Kovak v. Barron
2014 IL App (2d) 121100
Ill. App. Ct.2014Background
- F. Gary Kovac and Kenneth L. Barron, Jr. were equal (50/50) shareholders and directors of three S‑corporations (Pinnacle, Triad, Pressroom). Barron formed a payroll/paymaster entity (KES) and a separate Repair Services, Inc., which he controlled.
- Kovac alleged Barron caused the Operating Companies to divert repair revenues to Repair Services, secretly routed compensation through KES to pay excessive salaries/bonuses to himself and his wife Sandra, and concealed transfers by mischaracterizing payments as "contract labor."
- Procedurally, defendants moved to dismiss several counts; the trial court dismissed conversion and conspiracy counts and some cross‑claims. After a bench trial the court found for Kovac on fraud (constructive fraud), breach of fiduciary duty/mismanagement, and breach of an oral rental agreement; it awarded $3,220,702 (plus constructive trust), $327,790 to the Operating Companies for diverted repair revenue, $45,981 for rental profits, and $450,000 punitive damages against Barron’s estate.
- Posttrial the court entered judgment on the corporate mismanagement count in Kovac’s favor but awarded the repair‑income damages to the Operating Companies. Barron died during the litigation; Sandra (wife/estate administrator) appealed.
- The appellate court affirmed most rulings (fraud, constructive trust, mismanagement, punitive damages), reversed the individual recovery on the repair‑diversion claim (count II) because it was derivative, reinstated the Operating Companies’ derivative claim, and remanded to enter judgment for the corporations on diverted repair funds. Conversion and conspiracy claims against Sandra remained properly dismissed.
Issues
| Issue | Plaintiff's Argument (Kovac) | Defendant's Argument (Sandra) | Held |
|---|---|---|---|
| Whether evidence supported fraud/constructive fraud for unequal/excessive compensation | Barron admitted historic agreement to equal salaries; payments through KES and concealment show breach of fiduciary duty causing damages | Sandra argued admission was equivocal and fraud finding was against manifest weight | Trial court’s fraud/constructive fraud finding affirmed; Barron’s deposition admitted as judicial admission and evidence supported damages and constructive trust |
| Whether a constructive trust and punitive damages against decedent’s estate were proper remedies | Constructive trust prevents unjust enrichment; punitive damages appropriate given willful concealment, destruction of records, and violation of court orders | Sandra argued punitive damages should not survive tortfeasor’s death (majority rule rejects survival) | Constructive trust affirmed; punitive damages affirmed as not an abuse of discretion given extraordinary misconduct and deterrence rationale |
| Whether claims for diversion of repair income (count II) and related relief could be pursued directly by Kovac (individual) or were derivative/corporate | Kovac sought relief personally and on behalf of corporations; said he suffered direct injury as 50% shareholder | Sandra argued diversion injured corporations and only derivative claims were available; Operating Companies had no pending claim at trial | Appellate court reversed individual recovery on count II: diversion claim is derivative; reversed dismissal of Operating Companies’ cross‑claim and ordered that repair funds be awarded to the corporations on remand |
| Whether conversion and civil conspiracy counts against Sandra survived dismissal | Kovac alleged Sandra knowingly facilitated transfers to KES and received excessive pay; sought to hold her liable for conversion/conspiracy | Sandra asserted funds were not specific/identifiable (no conversion) and, as an employee/agent, cannot conspire with principal unless acting beyond authority | Dismissal affirmed: conversion failed because funds were not specifically earmarked; conspiracy failed because Sandra acted as agent (no allegation she acted as separate principal or beyond authority) |
Key Cases Cited
- Cirrincione v. Johnson, 184 Ill. 2d 109 (Ill. 1998) (elements and limits of conversion of funds)
- In re Thebus, 108 Ill. 2d 255 (Ill. 1985) (money not earmarked or separately identifiable cannot generally be the subject of conversion)
- Lawlor v. North American Corp. of Illinois, 2012 IL 112530 (Ill. 2012) (elements of constructive fraud and fiduciary duties)
- Buckner v. Atlantic Plant Maintenance, Inc., 182 Ill. 2d 12 (Ill. 1998) (no conspiracy between principal and agent absent agent acting beyond authority or for own distinct interest)
- Connelly v. Estate of Dooley, 96 Ill. App. 3d 1077 (Ill. App. 1981) (conversion claim viable where control over identifiable corporate assets was inconsistent with plaintiff’s ownership)
- Penberthy v. Price, 281 Ill. App. 3d 16 (Ill. App. 1996) (permitting punitive damages against a deceased tortfeasor’s estate under equitable considerations)
- Grunloh v. Effingham Equity, Inc., 174 Ill. App. 3d 508 (Ill. App. 1988) (factors considered in whether punitive damages survive defendant’s death)