Court Opinion

ID: 801506
Source: CourtListenerOpinion
Date Created: 2012-06-04 15:27:07+00
Date Added: 2024-06-11T18:00:00.495259
License: Public Domain

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