Rathje v. Horlbeck Capital Management, LLC
2014 IL App (2d) 140682
Appellate Court of Illinois, Second District
October 24, 2014
Illinois Official Reports
District & No.: Second District Docket No. 2-14-0682
Filed: October 24, 2014
Held (Note: This syllabus constitutes no part of the opinion of the court but has been prepared by the Reporter of Decisions for the convenience of the reader.): In an action arising from plaintiff‘s investment in a hedge fund organized as a limited partnership managed by an independent registered agent of defendant securities broker/dealer, the trial court, in plaintiff‘s action alleging breach of contract, breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation, and a violation of the Consumer Fraud and Deceptive Business Practices Act and seeking an accounting, properly entered an order conditioning defendant‘s right to arbitration on compliance with an outstanding discovery order, especially when defendant, which was originally named as a respondent in discovery, spent 2½ years evading the trial court‘s discovery orders before converting itself into a party defendant; furthermore, in view of the prejudice plaintiff suffered as a result of defendant‘s tactics, the trial court‘s finding that defendant waived the right to immediate arbitration was also upheld.
Decision Under Review: Appeal from the Circuit Court of Kane County, No. 11-CH-3589; the Hon. James R. Murphy, Judge, presiding.
Counsel on Appeal: James H. Knippen and Adam C. Kruse, both of Walsh, Knippen, Pollock & Cetina, Chrtd., of Wheaton, for appellant. Timothy D. Elliott and Kaitlyn A. Wild, both of Rathje & Woodward, LLC, of Wheaton, for appellee.
Panel: JUSTICE ZENOFF delivered the judgment of the court, with opinion. Justices Schostok and Spence concurred in the judgment and opinion.
OPINION
¶ 1 Defendant, Cantella & Co., Inc. (Cantella), appeals the trial court‘s order of June 12, 2014, asserting that the court improperly conditioned Cantella‘s right to arbitrate upon compliance with an outstanding discovery order. We affirm.
¶ 2 I. BACKGROUND
¶ 3 A. The Hedge Fund
¶ 4 In October 2002, plaintiff, S. Louis Rathje, as trustee of the S. Louis Rathje Trust, invested in a hedge fund. The hedge fund was organized as a limited partnership, HCM L.P., with Horlbeck Capital Management, LLC, as the general partner. Todd Horlbeck of St. Charles, Illinois, managed the hedge fund. Todd Horlbeck was also an independent registered representative with Cantella, a securities broker/dealer. Under a subscription agreement between plaintiff and HCM L.P., plaintiff was required to open an investor account at Cantella and to deposit into that account an amount equal to his capital contribution to HCM L.P. Cantella then transferred the funds in the account to the partnership. In connection with the investor account at Cantella, plaintiff signed two “suitability update” forms that provided for arbitration of any controversies between plaintiff and Cantella. Plaintiff‘s total investment in the hedge fund was $1.3 million.
¶ 5 Pursuant to an agreement between Todd Horlbeck and Cantella, the partnership was obligated to use Cantella‘s services as a broker/dealer with respect to all of the partnership‘s investments. The agreement between Todd Horlbeck and Cantella further provided that Cantella would establish brokerage accounts with Bear, Stearns & Company (Bear Stearns). From time to time, plaintiff received statements from the partnership purporting to value his share of the partnership‘s assets. Todd Horlbeck was responsible for calculating that value. The December 31, 2008, statement valued plaintiff‘s share of the partnership‘s assets at approximately $1.4 million. When the partnership was dissolved on April 29, 2009, plaintiff learned that the actual value of his share of the partnership‘s assets was $421,217.64.
¶ 7 On October 7, 2011, plaintiff filed suit against Horlbeck Capital Management, LLC, Todd Horlbeck, and HCM L.P. (collectively the Horlbeck defendants). In the suit, plaintiff named Cantella a respondent in discovery pursuant to
¶ 8 C. The Two-and-a-Half-Year Discovery Wrangle
¶ 9 According to an affidavit furnished by plaintiff‘s counsel, shortly after Cantella was served, Cantella‘s attorney requested an extension of time in which to respond to discovery. Plaintiff‘s counsel agreed to a one-month extension. When Cantella had not provided any discovery by mid-December 2011, plaintiff‘s counsel contacted Cantella‘s lawyer, who then requested an additional extension. In an email dated January 4, 2012, Cantella‘s counsel stated that he would send “responses and objections and production” by the end of that week.
¶ 10 According to plaintiff‘s counsel‘s affidavit, “a few days later, Cantella produced six documents, all of which related to the arbitration agreement between plaintiff and Cantella. On January 6, 2012, Cantella filed a “special and limited” appearance and a “motion to quash and for protective order.” Cantella argued that all of plaintiff‘s discovery requests should be quashed because plaintiff had signed documents agreeing to arbitrate “all controversies that may arise between” plaintiff and Cantella. The trial court denied the motion on April 10, 2012, on the ground that seeking discovery from Cantella was not a “controversy.” Cantella‘s position was that even service of a subpoena had to go through arbitration. However, Cantella did not appeal the denial of its motion to quash the discovery requests.
¶ 11 On April 10, 2012, the court ordered Cantella to file objections to plaintiff‘s discovery requests by May 2, 2012. Cantella never filed any such objections. On May 9, 2012, the court ordered Cantella to comply with written discovery within 14 days. Cantella did not comply. Then, on May 22, 2012, Cantella‘s counsel withdrew. On May 24, 2012, Cantella‘s new counsel filed a motion to stay enforcement of the May 9 order, on the basis that Cantella was going to file a motion to certify a question for appeal pursuant to
¶ 13 On August 14, 2012, Cantella filed a motion to terminate its status as a respondent in discovery, on the theory that the trial court lost jurisdiction over it when plaintiff did not timely seek to convert it to a party defendant. On August 16, 2012, plaintiff filed a motion for sanctions based on Cantella‘s failure and refusal to comply with discovery. On September 6, 2012, the court denied Cantella‘s motion to terminate and granted plaintiff‘s motion for sanctions. On September 14, 2012, Cantella agreed to a finding of contempt and appealed. This court affirmed the sanctions as modified in our order. Rathje v. Horlbeck Capital Management, LLC, 2013 IL App (2d) 121120-U, ¶ 24.
¶ 14 On June 25, 2013, Cantella filed a motion to refer the discovery dispute to arbitration. The court treated this as a motion to reconsider the April 10, 2012, denial of the original motion to quash the discovery requests and denied it. On July 19, 2013, the court ordered Cantella “to make a full document production immediately, recognizing that such production was to have been made by September 14, 2012.” The court further ordered that Cantella was to be fined $250 per day for every day after July 19, 2013, that it failed to tender a complete production of documents. Instead of producing documents, Cantella filed a motion to vacate the sanctions. The motion was based on the dismissal of plaintiff‘s second amended complaint against the Horlbeck defendants. The court denied Cantella‘s motion and allowed plaintiff to file a motion to reconsider the dismissal. The court later granted plaintiff‘s motion to reconsider in part. On December 4, 2013, the court again sanctioned Cantella for its refusal to produce documents and ordered production by December 19, 2013.
¶ 15 On December 19, 2013, Cantella moved to convert itself to a party defendant. The court granted the motion, and the written order provided that Cantella was to produce documents the same day. Cantella complied and produced 33,000 heavily redacted pages.
¶ 16 On April 8, 2014, plaintiff filed a third amended complaint, this time naming Cantella as a party defendant. Plaintiff asserted causes of action against Cantella for negligent supervision of the Horlbeck defendants, constructive fraud, unjust enrichment, and breach of contract on the theory that plaintiff was a third-party beneficiary of a contract between Todd Horlbeck and Cantella. On May 1, 2014, plaintiff filed a motion to compel Cantella to produce unredacted documents. On May 8, 2014, Cantella filed a motion to compel arbitration and stay the proceedings. The basis of the motion to compel arbitration was the shift in Cantella‘s status from a respondent in discovery to a party defendant. Now, Cantella asserted, a controversy existed between it and plaintiff, and, under the arbitration agreement that plaintiff signed, all controversies were to be arbitrated. The court heard both motions on June 12, 2014.
¶ 18 On June 12, 2014, Cantella‘s attorney explained to the court that Cantella had converted itself from a respondent in discovery to a party defendant, which was permitted under the Code, because doing so “could get [Cantella] where it needed to be *** such that a controversy would be raised against it that would be arbitrable.” The attorney reminded the court that Cantella had produced 33,000 pages such that “Cantella fulfilled largely its obligation to provide discovery in this case.” Cantella acknowledged that it owed plaintiff unredacted copies of the documents it had produced and stated that it would comply if the court denied the motion to compel arbitration. In response, plaintiff argued that Cantella waived arbitration altogether by converting itself to a party defendant. “[Cantella] decided [it] wanted to be sued,” plaintiff concluded.
¶ 19 Before ruling, the court heard the arguments on both parties’ motions—plaintiff‘s motion to compel production of unredacted documents and Cantella‘s motion to compel arbitration and stay proceedings. In its ruling, the court stated that Cantella waived arbitration to the extent of “completing what [it] had to do as either respondents [sic] in discovery or voluntary defendants [sic] in this case up to this point.” The court found waiver based on the “unique situation” in which Cantella effectively said “make us [sic] a defendant” and “by the way, here‘s 33,000 pages of documents.” The court granted plaintiff‘s motion to compel production of unredacted documents.
¶ 20 However, the court ruled that Cantella did not fully waive arbitration merely by self-converting from a respondent in discovery to a party defendant. The court stated: “I think that further proceedings against Cantella are arbitratable [sic] besides what I am going to retain jurisdiction on.” The court further said: “I‘m going to grant Cantella‘s motion [to compel arbitration] *** but on a delayed basis until [it has] complied with the discovery that [it owes] in this case, and so I think under the circumstances that I have the jurisdiction to do that ***.” The court reiterated that “any arbitration will be delayed until the compliance with previous orders of this court” relating to discovery. The court doubted the need for all the redactions in the 33,000 pages of documents and opined that Cantella had been using the arbitration agreement as a litigation strategy to avoid discovery. To stem further use of the arbitration agreement as a strategy to avoid disclosure, the court stated that it was “conditioning that arbitration for further consideration if there is no compliance.” The court decided to wait “to see whether there is compliance before fully sending this to arbitration and staying the proceedings against Cantella.”
¶ 21 On June 12, 2014, the court entered a written order. Paragraph 1 of the court‘s written order required Cantella to produce unredacted copies of the previously produced 33,000 documents by July 10, 2014. Paragraph 2 stated: “Defendant Cantella‘s motion to compel arbitration is conditionally granted, subject to Cantella‘s compliance with paragraph (1) above.” Paragraph 3 related to the Horlbeck defendants. Paragraph 4 set July 16, 2014, for status on Cantella‘s compliance with discovery and for “entry of the order granting Cantella‘s motion to compel arbitrations [sic].” On July 10, 2014, Cantella filed a notice of interlocutory appeal.
¶ 23 We must first address our jurisdiction. In Cantella‘s jurisdictional statement, it asserts that jurisdiction is proper under
¶ 24 We have no need to consider whether, or how, the FAA impacts our jurisdiction, because we agree with Cantella that we have jurisdiction under
¶ 25 To determine what constitutes an appealable order pursuant to
¶ 26 The next question is whether the order compelling Cantella to produce unredacted copies of the 33,000 pages of documents that it produced in December 2013 involved pure discovery matters that would not be appealable under
¶ 28 Cantella first contends that the trial court erred in conditioning arbitration on compliance with the court‘s order to produce unredacted copies of the documents it produced on December 19, 2013. Cantella argues that, once the trial court determined that the substantive dispute was covered by the arbitration agreement, no further discovery was permitted. The record shows that plaintiff opened an investor account with Cantella and deposited certain funds into that account. The arbitration agreement was part of a document updating that investor account.
¶ 29 Cantella maintains that, because the dispute is subject to the FAA, substantive federal law and decisions of the federal courts are binding on state courts, citing Carr v. Gateway, Inc., 241 Ill. 2d 15, 21 (2011) (“This court has recognized that, in construing federal laws, decisions of the federal courts are binding upon this court, to the end that such laws may be given uniform application.“). Applying federal law, Cantella concludes that the trial court erred in requiring it to engage in further discovery once the court decided that the matter was subject to arbitration, because the federal courts have held that all pretrial proceedings must be stayed, including discovery, when a dispute is subject to the FAA.
¶ 30
¶ 32 Here, Cantella was named a respondent in discovery on October 11, 2011, and it was served on October 12, 2011. In January 2012, Cantella moved to quash plaintiff‘s discovery requests, on the basis of the arbitration agreement. The trial court resolved against Cantella the issue of whether the agreement required arbitration of discovery matters, and it denied the motion to quash. Although Cantella could have immediately appealed that interlocutory order under
¶ 33 By December 19, 2013, Cantella still had not produced the documents that plaintiff had requested and that Cantella had at one point agreed to produce. The court‘s written order of December 19, 2013, reflects that Cantella‘s “request to invoke the jurisdiction of the court and be converted to a party defendant” was granted. Much has been written about the respondent-in-discovery statute, but there is a paucity of judicial interpretation of the part of the statute that allows respondents in discovery to convert themselves to party defendants. It certainly was not necessary for Cantella to “invoke the jurisdiction of the court,” because the court had acquired jurisdiction over Cantella “for all purposes” when Cantella was served on October 12, 2011. Allen, 275 Ill. App. 3d at 703. Its jurisdiction over Cantella continued, uninterrupted, after Cantella self-converted to a party defendant, because, once a court acquires in personam jurisdiction, that jurisdiction continues until all issues of fact and law are determined. Whitley, 73 Ill. App. 3d at 766 (court retained jurisdiction over physician who was converted to a defendant, because jurisdiction was acquired when the doctor had been served as a respondent in discovery).1 Thus, although
¶ 35 It is an elementary principle of law that a court has the inherent power to enforce its orders. Smithberg v. Illinois Municipal Retirement Fund, 192 Ill. 2d 291, 297 (2000). The court ordered Cantella to comply with document production by December 19, 2013. The court did not order the production of redacted documents where there was no apparent purpose for the redactions. Therefore, the June 12, 2014, order requiring Cantella to produce unredacted copies of the documents was in practicality an order enforcing its December 4, 2013, order to produce the documents by December 19, 2013. The court had the right and the responsibility to monitor compliance with the December 4, 2013, order, as a party‘s purported compliance does not discharge its responsibility unless the court finds the compliance acceptable. Anderson Dundee 53, L.L.C. v. Terzakis, 363 Ill. App. 3d 145, 157 (2005). In addition, the court has the inherent authority to impose sanctions for the failure to comply with its orders. Cronin v. Kottke Associates, LLC, 2012 IL App (1st) 111632, ¶ 39. The purpose of the inherent power to impose sanctions is to vindicate and maintain the integrity of our court system. Sander v. Dow Chemical Co., 166 Ill. 2d 48, 68 (1995).
¶ 36 Under these circumstances, the cases Cantella cites for the proposition that the trial court must stay all discovery upon announcing its intention to grant the motion to compel arbitration are inapplicable. In Suarez-Valdez v. Shearson Lehman/American Express, Inc., 858 F.2d 648 (11th Cir. 1988), the court of appeals held that the district court erred in failing to stay discovery where the defendants moved to stay the action pending arbitration, but it is clear from the context that the motion came before any discovery had been conducted. Suarez-Valdez, 858 F.2d at 649-50. Similarly, in Lummus Co. v. Commonwealth Oil Refining Co., 273 F.2d 613, 614 (1st Cir. 1959), the court stayed discovery pending arbitration where no discovery had been undertaken. In Klepper v. SLI, Inc., 45 F. App‘x 136, 139 (3d Cir. 2002), an unpublished decision, the court of appeals vacated the district‘s court‘s order requiring the completion of discovery, which was entered without a prior ruling on the arbitrability of the underlying stock-option issue. However, it is clear that the defendant sought arbitration before any discovery had been ordered and then immediately appealed the district court‘s order denying arbitration and ordering discovery. Klepper, 45 F. App‘x at 138.
¶ 38 We reiterate that the trial court had the authority to enforce its discovery orders that were entered while Cantella was a respondent in discovery, for the reasons stated above. It follows that the court also had the authority to condition arbitration of the merits of the dispute on compliance with its discovery orders. A court has the power to sanction pursuant to its inherent authority to control its docket. Dolan v. O‘Callaghan, 2012 IL App (1st) 111505, ¶ 65. The recognition of this authority is necessary to prevent undue delays in the disposition of cases, caused by abuses of procedural rules. Dolan, 2012 IL App (1st) 111505, ¶ 65. The instant case presents a shocking abuse of the rules by Cantella. It spent 2½ years evading and thwarting the court‘s orders. Accordingly, we hold that, under these circumstances, the court did not err in conditioning arbitration on compliance with the order to produce unredacted documents.
¶ 39 Next, Cantella argues that the trial court erred in finding that it waived arbitration. Under
¶ 41 Cantella attempts to inject ambiguity into the sequence of events on December 19, 2013, by suggesting that its document production preceded its self-conversion to a party defendant. There is no report of proceedings for that date, but the written order makes clear what occurred relating to the production of the documents. First, the court granted Cantella‘s request to be converted to a party defendant. Second, the court granted plaintiff leave to file an amended complaint against all “defendants.” Third, the court entered and continued plaintiff‘s request to lift the stay on sanctions against Cantella “in the event full document production” was not made by December 19, 2013.2 Had Cantella already produced the documents, there would have been no need to continue the matter to monitor its compliance. At the hearing on June 12, 2014, Cantella‘s counsel made clear that Cantella had produced the documents upon its self-conversion to a party defendant so that plaintiff could decide whether to sue Cantella or dismiss it from the action.
¶ 42 In producing 33,000 pages of documents, which Cantella‘s attorney described as largely fulfilling Cantella‘s discovery obligation as a respondent in discovery, Cantella undermined its own strategy to pursue its right to limited discovery under the arbitration agreement. Cantella‘s voluntary production of 33,000 pages of documents was so inconsistent with its asserted right either to arbitrate all discovery matters or to limit the scope of discovery to what was outlined in the arbitration agreement that it waived such rights. Cantella‘s production was voluntary in the sense that it was purposeful toward Cantella‘s own goal of being sued so that a “controversy” would exist. The history of this litigation indicates that Cantella knew how to defy discovery orders and accept being held in contempt when doing so suited its own ends.
¶ 44 Perhaps the best example of Cantella‘s conduct that was inconsistent with the assertion of its right to arbitrate discovery matters was Cantella‘s admission to the court, in a document on June 11, 2012, that it could choose to convert itself right then to a party defendant, thereby terminating the application of
¶ 45 For these reasons, Cantella‘s reliance on Jenkins v. Trinity Evangelical Lutheran Church, 356 Ill. App. 3d 504 (2005), is misplaced. In Jenkins, the court held that the defendants did not waive their right to arbitrate where they raised the issue within a reasonable period after the filing of the complaint and then had “little choice but to participate in the litigation and file pleadings” after the court denied their motion for summary judgment. Jenkins, 356 Ill. App. 3d at 508. Here, in contrast, Cantella recognized, at least as of June 2012, that it could choose not to participate any longer as a respondent in discovery. So, while Cantella initially raised the issue of arbitration as soon as it entered the case, unlike the defendants in Jenkins it could have chosen not to participate in the litigation, by promptly terminating its status as a respondent in discovery.
¶ 46 We next examine whether plaintiff was prejudiced. In deciding whether a party has waived its arbitration rights, the court also considers whether the opposing party has been prejudiced as a result of the acts purportedly constituting waiver. Envirex, 832 F. Supp. at 1296. While the trial court made no specific finding that plaintiff was prejudiced, that finding is implicit in its ruling that a partial waiver of arbitration occurred. Cantella contends that plaintiff could have avoided any alleged prejudice from having to draft a complaint by initiating arbitration, as Cantella argues he was obliged to do. According to Cantella, the time and resources that plaintiff expended in preparing the third amended complaint would have been necessary regardless of whether the dispute pended in court or in arbitration. Even if that were true, had Cantella cooperated with its obligations as a respondent in discovery once the trial court denied its motion to quash plaintiff‘s discovery requests and it chose not to appeal, or had it immediately appealed the April 2012 denial of arbitration, instead of foot-dragging for over two years, plaintiff would not have incurred the enormous fees he did.
¶ 48 B. Plaintiff‘s Contention
¶ 49 Plaintiff contends that the trial court erred in finding that Cantella‘s waiver of arbitration was only partial. It is plaintiff‘s position that Cantella‘s self-conversion to a party defendant waived its right to arbitration altogether, as Cantella requested to be sued. In essence, plaintiff claims that the order of June 12, 2014, was adverse to him. A notice of cross-appeal is mandatory for review of a judgment adverse to the appellee. Greco v. Coleman, 176 Ill. App. 3d 394, 400-01 (1988). Here, because plaintiff did not file a notice of cross-appeal, we are not authorized to examine or decide this issue.
¶ 50 III. CONCLUSION
¶ 51 For the foregoing reasons, the judgment of the circuit court of Kane County is affirmed.
¶ 52 Affirmed.