ICD Publications, Inc. v. Gittlitz
2014 IL App (1st) 133277
Ill. App. Ct.2015Background
- ICD Publications was co-founded by Ian Gittlitz, Cyndi Evans, and David Palcek; each owned one-third; Gittlitz was president and controlled corporate finances and cards.
- From at least 2000–2007 Gittlitz submitted fraudulent expense reports (“double dipping”) and wrote himself improper checks labeled as “advances,” embezzling over $1.2 million; he later pleaded guilty to mail fraud for $250,000 of the conduct.
- In May 2007 Evans and Palcek confronted Gittlitz, obtained a signed “Change of Financial Controls” (CFC) agreement that included a confidentiality/release clause and an audit/“restitution” plan; they later discovered additional concealed fraud and forged bank documents.
- ICD terminated Gittlitz for cause in July 2007, sought involuntary repurchase of his shares under a 2003 shareholders agreement (purchase at “book value”), and sued him for breach of fiduciary duty, fraud, usurpation, and related claims; Gittlitz counterclaimed for breach of the CFC release, unjust enrichment, and shareholder-inspection rights.
- The trial court granted summary judgment on liability for breach of fiduciary duty and fraud, held a bench trial on damages and remaining issues, awarded forfeiture of compensation ($6,021,657), misappropriation ($1,220,623) plus interest, punitive damages of $2,000,000, ordered specific performance of the stock repurchase at book value, and dismissed Gittlitz’s counterclaims; the appellate court affirmed.
Issues
| Issue | Plaintiff's Argument (ICD) | Defendant's Argument (Gittlitz) | Held |
|---|---|---|---|
| Forfeiture of compensation for period of breach | Forfeiture appropriate to strip fiduciary gains; expert evidence supports gross compensation figure | Forfeiture should be reduced for taxes, undistributed dividends, and commissions; many years lacked expense reports | Affirmed: complete forfeiture allowed; gross compensation supported by evidence and equitable discretion to deter fiduciary breaches |
| Punitive damages ($2,000,000) | Warranted by willful, calculated, multi-year concealment and embezzlement | Unnecessary because criminal restitution paid and some claims (Travel Trade) dismissed | Affirmed: punitive damages not excessive and within discretion given nature/duration of misconduct |
| Validity/effect of CFC agreement release | CFC is voidable because Gittlitz failed to fully disclose material facts as fiduciary; release does not cover unknown concealed claims | CFC is a release preventing civil/criminal claims if restitution made; Evans/Palcek relied on it | Affirmed: release voidable due to fraudulent concealment by fiduciary; in any event release did not cover undisclosed/unknown embezzlement |
| Stock repurchase remedy and valuation | Shareholders agreement (2003) governs repurchase at book value; ICD entitled to specific performance | Employment agreement (renewed) entitled Gittlitz to market-value buyout; book-value is an unenforceable penalty; election of remedies bars both damages and buyout | Affirmed: shareholders agreement supersedes employment agreement; repurchase at book value is enforceable (not a penalty); election of remedies inapplicable because damages and specific performance address different breaches |
| Unjust enrichment re: undistributed S-corp earnings | No enforceable oral agreement to withdraw retained earnings; unjust enrichment inapplicable where contract governs | There was oral annual agreement allowing any shareholder to demand their share of retained earnings; Gittlitz owed >$1M | Affirmed dismissal: trial court credited ICD testimony over Gittlitz and found no agreement; unjust enrichment inappropriate where contract/express arrangements govern |
| Shareholder inspection right after termination | ICD refused post‑termination inspection for improper purpose because Gittlitz was adverse and defendant in litigation | Gittlitz sought records to prepare for stock transfer and had proper purpose | Affirmed dismissal: request was not for a proper corporate purpose given his termination for cause and adversarial position |
Key Cases Cited
- In re Marriage of Pagano, 154 Ill. 2d 174 (Ill.) (forfeiture of compensation may be ordered in egregious fiduciary breaches)
- Levy v. Markal Sales Corp., 268 Ill. App. 3d 355 (Ill. App.) (Illinois permits complete forfeiture of fiduciary salary during breach)
- Tully v. McLean, 409 Ill. App. 3d 659 (Ill. App.) (standard for punitive damages and forfeiture for willful fiduciary breaches)
- LID Associates v. Dolan, 324 Ill. App. 3d 1047 (Ill. App.) (willful fiduciary breach can require complete forfeiture)
- Grandon v. Amcore Trust Co., 225 Ill. App. 3d 630 (Ill. App.) (shareholder transfer restrictions and buyouts in close corporations are enforceable)
- Douglas Theater Corp. v. Chicago Title & Trust Co., 288 Ill. App. 3d 880 (Ill. App.) (election of remedies doctrine prevents inconsistent remedies only where they address the same breach)