Comedy Cottage, Inc. v. Berk
495 N.E.2d 1006, 145 Ill. App. 3d 355, 99 Ill. Dec. 271 (1986)
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Rule of Law:
A corporate officer's fiduciary duty of loyalty is not severed by resignation if the officer uses information acquired during their employment to seize a corporate opportunity for themselves, even if the transaction is completed after their resignation.
Facts:
- Edward Hellenbrand, owner of Comedy Cottage, Inc., hired Jay Berk as general manager, later promoting him to vice-president and giving him 10% of the company's shares.
- Hellenbrand moved to Nevada due to health problems, leaving Berk to manage the club's daily affairs.
- In 1984, the club's lease expired, and Hellenbrand instructed Berk to negotiate a new lease with the new landlord, Carl Swanson.
- Berk negotiated a month-to-month lease but listed himself as the lessee, not the corporation.
- On March 30, 1985, the landlord delivered a notice to Berk terminating the Comedy Cottage's month-to-month tenancy.
- Upon receiving the termination notice, Berk immediately telephoned Hellenbrand to resign from his position.
- After resigning, Berk formed a new corporation, the Comedy Company, Inc., and by April 6, 1985, had executed a lease for the same premises for his new company.
Procedural Posture:
- Edward Hellenbrand and Comedy Cottage, Inc. filed a complaint for injunctive relief against Jay Berk and others in the Circuit Court of Cook County (trial court).
- The trial court granted a temporary restraining order.
- The landlord, Carl Swanson, was dismissed as a party pursuant to a settlement.
- The trial court, after hearing testimony, found Berk breached his fiduciary duty and issued a preliminary injunction enjoining him from interfering with the plaintiffs' possession of the premises.
- Berk, as the appellant, filed an interlocutory appeal of the injunction to the appellate court.
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Issue:
Does a corporate officer breach his fiduciary duty of loyalty by resigning upon learning of the corporation's lease termination and then immediately acquiring that same lease for his own competing business?
Opinions:
Majority - Justice O’Connor
Yes, a corporate officer breaches his fiduciary duty by resigning to immediately acquire a corporate opportunity. An officer's fiduciary duty of loyalty includes the obligation to disavow any corporate opportunity where the officer's private interests conflict with the corporation's. Comedy Cottage had a protectable interest in the expectancy that its lease would be renewed. The resignation of an officer does not sever liability for transactions that began during the employment relationship or were founded on information acquired during it. Berk was entrusted with lease negotiations and used the confidential knowledge of the lease's termination, gained through his position, to resign and acquire the lease for himself, which hindered the corporation's plans and constituted a breach of his duty.
Analysis:
This decision reinforces that the fiduciary duty of loyalty is not a technicality that can be circumvented by a strategically timed resignation. It establishes that the duty continues to apply to transactions that are founded on information or opportunities gained during employment. This precedent makes it more difficult for corporate insiders to usurp opportunities they were entrusted to secure for their corporation, thereby protecting the corporation's interest in its goodwill and business location, which the court recognizes as a protectable expectancy.
