Nation v. American Capital, Ltd.: Seventh Circuit Upholds Summary Judgment on Conditional Privilege Grounds

In Nation v. Am. Capital, Ltd., 2012 U.S. App. LEXIS 11214 (7th Cir., June 4, 2012), the Seventh Circuit Court of Appeals affirmed the district court’s grant of summary judgment against James Nation (“Plaintiff”) on his claim that American Capital, Ltd., (“Defendant”) tortiously interfered with a settlement contract between Plaintiff and his former employer, Spring Air.

Plaintiff had been Spring Air’s president and chief executive officer since 1995.  In 2007, Defendant helped finance Spring Air’s acquisition by HIG Capital (“HIG”) and, in the process, Defendant acquired a minority interest in Spring Air and a seat on the board of directors.  Shortly after acquiring Spring Air, HIG replaced Plaintiff as president and CEO and granted him a severance package of $1.2 million in return for his agreement not to work for any competitor through 2008.  Payments under this severance arrangement were spread over a period of fifteen months.  In 2008, Spring Air encountered severe financial difficulty, and Defendant agreed to provide additional cash to Spring Air in exchange for additional board seats.  By June 2008, Defendant “was the majority equity holder and controlled four of the seven seats on the Spring Air board.”

In August 2008, Spring Air stopped severance payments to Plaintiff and three other former employees.  In response, Plaintiff filed suit against Spring Air for the remaining severance payments.  When Spring Air filed for Chapter 7 bankruptcy in May 2009, Plaintiff brought a separate action against Defendant that alleged tortious interference with contract.  Plaintiff argued that Defendant, by virtue of its controlling position,  induced Spring Air to breach the severance agreement.

The district court granted summary judgment,  finding that Defendant “was conditionally privileged to interfere with [Plaintiff’s] contract based on [Defendant’s] status as Spring Air’s majority shareholder” and that Plaintiff had failed to present sufficient evidence to overcome this conditional privilege.

Under Illinois law, conditional privilege is an arm of the business judgment rule that allows a defendant “to protect an interest which the law deems to be of equal or greater value than the plaintiff’s contractual rights.”  The conditional privilege theory is based on the premise that the interests of a corporation and its officers, directors, and shareholders are sufficiently aligned such that officers, directors, and shareholders cannot be liable for tortious interference with the company’s contracts when that interference benefits the company.

In this case, the court held that Defendant’s position as Spring Air’s majority investor gave it the right to “lawfully influence the actions of the company in pursuit of the company’s affairs,” as well as a legitimate interest in protecting Spring Air’s value for shareholders.  The court also noted that Defendant likely had further privileges by virtue of its status as Spring Air’s major creditor; ultimately, the court rested its conditional privilege decision on Defendant’s status as Spring Air’s majority shareholder.

Finally, the court held that Plaintiff failed to overcome Defendant’s claim of conditional privilege because Plaintiff did not show that Defendant “induced the breach to further [its] personal goals or to injure [the plaintiff], and acted contrary to the best interests of the corporation.”  The court affirmed the trial court’s finding that Plaintiff offered no evidence indicating either that Defendant induced the breach of the severance agreement “for any reason other than to protect its investment and to preserve [shareholder value]” or to injure Plaintiff.  To the contrary, the court found Defendant’s interference with the severance agreement to be “amply justified” and warranting a grant of summary judgment in Defendant’s favor based upon the theory of conditional privilege.

The primary materials for this case may be found at the DU Corporate Governance website.

Greg Diamond