Patrick J. Halperin v. Thomas C. Halperin
Filing
Filed opinion of the court by Judge Posner. AFFIRMED. Richard A. Posner, Circuit Judge; Joel M. Flaum, Circuit Judge and Ilana Diamond Rovner, Circuit Judge. [6570780-1] [6570780] [12-3466]
Case: 12-3466
Document: 43
Filed: 04/24/2014
Pages: 10
In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 12‐3466
PATRICK J. HALPERIN,
Plaintiff‐Appellant,
v.
THOMAS C. HALPERIN,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 10 C 4104 — Matthew F. Kennelly, Judge.
____________________
ARGUED APRIL 3, 2014 — DECIDED APRIL 24, 2014
____________________
Before POSNER, FLAUM, and ROVNER, Circuit Judges.
POSNER, Circuit Judge. This is a diversity suit for fraud
(the governing substantive law being that of Illinois) arising
out of a falling‐out between two brothers, Patrick and Tho‐
mas Halperin. Each owned one‐third of the common stock of
Commercial Light Company. A third brother, Daniel, owned
the other third; he is not a party to the suit.
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Commercial Light was a substantial family‐owned elec‐
trical contractor, founded by the brothers’ grandfather, that
has installed major lighting systems in Chicago, such as the
lighting systems of the John Hancock Center and Wrigley
Field. The company still exists but is no longer owned by the
family, having been sold in 2008.
Between 1982 and the sale of the company, Thomas
Halperin was the CEO, board chairman, and president. His
principal subordinates were the company’s treasurer, Mi‐
chael Sorden, and its executive vice‐president, Scott Morris.
(We’ll refer to Halperin, Sorden, and Morris as “the offi‐
cers.”) The board of directors had only two members: Tho‐
mas and a lawyer who provided legal services to the com‐
pany. Patrick and Daniel had their own careers, and took no
part in the company’s management.
The suit charges that when Morris became executive
vice‐president in 1992, he, with Thomas’s approval, started
jacking up the salaries and bonuses paid to himself, Sorden,
and Thomas. As a result, the compensation of the three offi‐
cers soared, totaling $22 million between 1993 and 2000.
Here is the year by year and total compensation of the three,
both separately and collectively:
Thomas
Halperin
Scott
Morris
Michael
Sorden
Total
4/1/93 –
3/31/94
$330,471
$256,051
$166,398
$752,920
4/1/94 –
3/31/95
$322,025
$316,992
$189,379
$828,396
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Thomas
Halperin
Scott
Morris
4/1/95 –
3/31/96
$306,031
4/1/96 –
3/31/97
$917,001 $1,577,417
4/1/97 –
3/31/98
4/1/98 –
3/31/99
$1,247,249
$219,529
Michael
Sorden
$199,836
Total
$725,396
$697,740 $3,192,158
$655,367
$344,384 $2,247,000
$738,908 $1,137,944
$547,259 $2,424,111
4/1/99 –
3/31/00
$1,042,585
$718,726
$364,284 $2,125,595
4/1/00 –
3/31/01
$3,593,270 $4,317,178
$1,892,982 $9,803,430
Total (8
years)
$8,497,540 $9,199,204
$4,402,262 $22,099,006
The suit charges that the company fraudulently repre‐
sented to Patrick and Daniel that the executives’ compensa‐
tion was approved by the board of directors, when in fact
the lawyer who was the only member of the board besides
Thomas rubber‐stamped Thomas’s compensation decisions.
The only information about compensation that Thomas dis‐
closed to his brothers was a line in the company’s annual fi‐
nancial statement that listed total executive compensation;
there was no indication of how much each executive had re‐
ceived or even how many executives there were. The suit
also accuses Thomas of having disobeyed the firm’s audi‐
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tors, who had told him that he had a duty to inform Patrick
of the compensation that the company was paying Thomas.
The suit claims that the payment of excessive compensa‐
tion, and the concealment from Patrick, a shareholder, of the
amount of compensation received by the three officers, were
breaches of the fiduciary obligation that under Illinois law
Thomas, as the company’s board chairman and CEO, owed
to Patrick and Daniel, the other two shareholders of this
closely held corporation. Kovac v. Barron, 2014 WL 897041, at
*11 (Ill. App. March 7, 2014); Rexford Rand Corp. v. Ancel, 58
F.3d 1215, 1218–19 (7th Cir. 1995) (Illinois law); see also
Donahue v. Rodd Electrotype Co. of New England, Inc., 328
N.E.2d 505, 515 (Mass. 1975); Meinhard v. Salmon, 164 N.E.
545, 546 (N.Y. 1928) (Cardozo, C.J.); Frank H. Easterbrook &
Daniel R. Fischel, “Close Corporations and Agency Costs,”
38 Stanford L. Rev. 271, 278, 291 (1986). True, much of the ex‐
cess went not to Thomas but to Morris and Sorden—indeed
in several years Morris’s compensation exceeded Thomas’s.
But any excessive compensation, however distributed
among the recipients, that was enabled by a breach of fidu‐
ciary duty by Thomas deprived Patrick of compensation that
he might have received as a one‐third owner.
The evidence that the compensation of the three officers
was excessive is somewhat scanty. It seems possible that the
excessive‐seeming compensation was either reasonable in
light of the contributions that the officers made to the profit‐
ability of the company, or was, as in many closely held com‐
panies, a substitute for dividends. The shareholder‐
managers of such companies often prefer salaries to divi‐
dends to avoid double taxation: “a dollar of net income re‐
turned to the owner as a dividend is taxed twice, first as in‐
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come to the corporation and again as income to the individ‐
ual. To minimize the pain of double taxation, corporations
… rationally find ways to provide returns for their owners in
the form of compensation and perquisites.” Reis v. Hazelett
Strip‐Casting Corp., 28 A.3d 442, 471 (Del. Ch. 2011).
But the jury didn’t have to find that the compensation
was excessive in order to find a breach of fiduciary duty. The
shenanigans noted earlier whereby Thomas concealed from
Patrick the largesse that Thomas was awarding himself and
the two officers was a breach of his fiduciary duty to his
brothers as shareholders. And while it might seem that, even
so, there would be no damages unless the largesse were ex‐
cessive, Illinois allows as a remedy for breach of fiduciary
duty a forfeiture to the victim of the breach (Patrick) of all
the fiduciary’s earnings during the period of breach. In re
Marriage of Pagano, 607 N.E.2d 1242, 1249–50 (Ill. 1992); Levy
v. Markal Sales Corp., 643 N.E.2d 1206, 1219–20 (Ill. App.
1994); Gross v. Town of Cicero, 619 F.3d 697, 712 (7th Cir. 2010)
(Illinois law). (The third brother, Daniel, was a victim too,
but as we said he is not a party.)
We needn’t burrow deeper into the merits of Patrick’s
claim; for while the jury agreed that Thomas had breached a
fiduciary duty to Patrick, its verdict was for Thomas, be‐
cause it accepted his defense that Patrick had waited too
long to sue. The applicable Illinois statute of limitations is
five years. 735 ILCS 5/13‐205; see Armstrong v. Guigler, 673
N.E.2d 290, 296–97 (Ill. 1996); Havoco of America, Ltd. v. Sumi‐
tomo Corp. of America, 971 F.2d 1332, 1336–37 (7th Cir. 1992)
(Illinois law). Patrick had sold all his stock in Commercial
Light Company in 2000, after which Thomas had no fiduci‐
ary duty to him. But Patrick didn’t file suit until 2010, more
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than five years after Thomas’s alleged breach of his fiduciary
duty had ended. Patrick claims, however, not to have dis‐
covered the breach until 2008, and he filed suit only two
years after that.
The statute of limitations does not begin to run until the
wronged “person knows or reasonably should know of his
injury and also knows or reasonably should know that it
was wrongfully caused. At that point the burden is upon the
injured person to inquire further as to the existence of a
cause of action.” Witherell v. Weimer, 421 N.E.2d 869, 874 (Ill.
1981). This is a version of the well known “discovery rule” of
when a statute of limitations begins to run.
Thomas presented evidence that Patrick, a former CEO
with two doctoral degrees, should have discovered the fraud
more than five years before 2010. Maybe so; but there is
more to the statute of limitations than the discovery rule.
The more is that “if a person liable to an action fraudulently
conceals the cause of such action,” the statute of limitations
doesn’t begin to run until the plaintiff “discovers that he or
she has such cause of action.” 735 ILCS 5/13‐215. And if the
defendant is a fiduciary of the plaintiff, as Thomas was of
Patrick, then even “mere silence on [the defendant’s] part as
to a cause of action, the facts giving rise to which it was his
duty to disclose, amounts to a fraudulent concealment.” Chi‐
cago Park District v. Kenroy, Inc., 402 N.E.2d 181, 185 (Ill.
1980); see also DeLuna v. Burciaga, 857 N.E.2d 229, 246 (Ill.
2006).
Because the applicability of the statute of limitations
turned on contested facts in this case, the issue was properly
submitted to the jury, Begolli v. Home Depot U.S.A., Inc., 701
F.3d 1158, 1159–60 (7th Cir. 2012); Aebischer v. Stryker Corp.,
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535 F.3d 732, 734 (7th Cir. 2008); Fowler v. Land Management
Groupe, Inc., 978 F.2d 158, 162 (4th Cir. 1992); Riddell v. Riddell
Washington Corp., 866 F.2d 1480, 1484 (D.C. Cir. 1989); cf.
Witherell v. Weimer, supra, 421 N.E.2d at 874—and the jury
determined that the suit was indeed time‐barred. Patrick ar‐
gues that the jury based that determination on an incorrect
instruction given by the judge: that the five‐year statute of
limitations would not run “during any period in which Pat‐
rick proves by a preponderance of the evidence that Thomas
concealed his wrongdoing from Patrick. Under the law,
Thomas owed Patrick, as a Commercial Light stockholder, a
fiduciary duty to disclose material facts concerning the op‐
eration and management of Commercial Light. For this rea‐
son, any failure by Thomas to disclose facts that he was un‐
der a duty to disclose amounts to concealment. In this re‐
gard, Patrick was not required to scrutinize Thomas for mis‐
conduct, unless there was a prior indication of wrongdoing.”
Patrick objects to the sentence: “Thomas owed Patrick, as
a Commercial Light stockholder, a fiduciary duty to disclose
material facts concerning the operation and management of
Commercial Light.” Patrick wanted (but the judge refused)
to substitute the following: “Thomas was required to dis‐
close all material facts concerning the extent of Patrick‘s
claim against him.” Patrick defends his proposed but re‐
jected substitute instruction primarily on Wisniewski v. Dio‐
cese of Belleville, 943 N.E.2d 43 (Ill. App. 2011), a case involv‐
ing alleged concealment by a Catholic diocese of sexual
abuse by a priest, where an instruction very similar to the
one that Patrick wanted the judge to substitute in this case
was indeed given. The instruction, which required the de‐
fendant “to disclose all material facts concerning the exis‐
tence of plaintiff’s cause of action against the defendant,”
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was held on appeal to have been proper. For remember the
“mere silence” language of Chicago Park District v. Kenroy,
supra. A fiduciary has a duty to inform his beneficiary of
facts material to the fiduciary relationship, such as, in the
case of a trustee, the amount of money held in the trust. A
failure to comply with the duty to inform that prevents the
beneficiary from learning something the fiduciary is duty‐
bound to communicate to him (such as that the fiduciary is
stealing from him!) is concealment, and is fraudulent be‐
cause it is taking advantage of the beneficiary’s dependence
on the fiduciary.
The duty of disclosure is of course limited to facts mate‐
rial to the alleged breach of fiduciary duty. Thomas was not
required to give his brothers a running commentary on his
personal life. The only facts material to the breach were facts
relating to the operation and management of Commercial
Light Company. Thomas and his two principal subordinates
were the management of Commercial Light Company, and
controlled the company’s operation, so his concealment of
the officers’ compensation from the other shareholders was a
breach of a fiduciary duty that he owed them.
But this means that the judge’s instruction and Patrick’s
proposed instruction were substantively the same. The only
real difference was that Patrick’s—“Thomas was required to
disclose all material facts concerning the extent of Patrick’s
claim against him”—was confusing, because of the ambigu‐
ity of the word “claim.” Did that word in context mean his
suit, and did “extent” refer to the size of the claim, which
Thomas could hardly be expected to know until the suit was
filed? What Patrick’s lawyer seems to have been trying to
say in the proposed instruction was not that Thomas should
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be credited with prevision, but that he should have disclosed
to Patrick during the fraud period all facts relating to the
compensation of Thomas and the other two senior officers
that Patrick as a shareholder was entitled to know. After all,
Patrick and the third brother, Daniel, between them owning
two‐thirds of the company’s stock, could have fired Thomas
if they thought he was being greedy. Patrick’s proposed in‐
struction did not refer to the management or operation of the
company, however—but the judge’s did, and so gave Pat‐
rick’s lawyer all the room he needed to be able to argue to
the jury that the three officers’ compensation was a material
fact concerning the operation and management of the com‐
pany. In arguing that Patrick’s claim had been timely, the
lawyer pointed out that Thomas hadn’t disclosed the indi‐
vidual compensation amounts to Patrick until 2008.
The jury rejected the argument, in all likelihood deter‐
mining that Patrick should have discovered the breach of
fiduciary duty (remember that the jury determined that
there was a breach) and sued by 2005 (really should have
discovered it much earlier, since Patrick claims that the
breach began in 1993). He had received the company’s an‐
nual financial reports throughout the entire period, and they
disclosed not only total executive compensation (that is, in‐
cluding but not limited to the compensation paid the three
officers), but also total revenue and operating expenses and
net profit. The financial statement for 1997, for example,
showed executive compensation of more than $3.5 million—
almost 40 percent of the $9.1 million in total operating ex‐
penditures of the company—which seems high for a com‐
pany that reported net income of only $365,000 on total reve‐
nue that year of $31 million. Highly educated and with busi‐
ness experience, Patrick knows what a board of directors is.
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He could have demanded copies of the minutes of the direc‐
tors’ meetings. The meetings themselves were a farce, but
the minutes contain a good deal of financial information—
including detailed compensation figures for Thomas and the
other executives.
But if as we’re surmising the jury just thought that Pat‐
rick should have discovered Thomas’s breach of fiduciary
duty within the five‐year limitations period, and that was
the basis of the jury’s verdict, the verdict was wrong.
“Should have discovered” is what starts the statute of limita‐
tions running; fraudulent concealment stops it—and a fidu‐
ciary’s silence regarding facts material to a breach of fiduci‐
ary duty is a form of fraudulent concealment. But the appeal
challenges not the verdict’s correctness but only the refusal
to substitute Patrick’s instruction for the judge’s instruction.
And that was not an error. The judgment is therefore af‐
firmed.
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