Kleinwort Benson North America, Inc. v. Quantum Financial Services, Inc.

Annotate this Case
Kleinwort Benson v. Quantum, No. 82444 (2/20/98)

Docket No. 82444--Agenda 24--May 1997.
KLEINWORT BENSON NORTH AMERICA, INC., Appellant, v.
QUANTUM FINANCIAL SERVICES, INC., Appellee.
Opinion filed February 20, 1998.

JUSTICE NICKELS delivered the opinion of the court:
The issue presented here is whether punitive damages can be
recovered by assignees after a common law fraud claim brought by a
corporation has been assigned by the corporation to its former
shareholders. The corporation in this case is Quantum Financial
Services, Inc. (Quantum). As part of a declaratory judgment action filed
in the circuit court of Cook County, Quantum filed several
counterclaims, including a fraud claim, against Kleinwort Benson North
America, Inc., Kleinwort Benson Ltd., and Marcus Hutchins
(collectively, Kleinwort). Quantum later assigned these counterclaims to
the former shareholders of Quantum. The appellate court held that the
former shareholders, as assignees, could seek punitive damages on the
assigned fraud claim. 285 Ill. App. 3d 201. This court allowed
Kleinwort's petition for leave to appeal (166 Ill. 2d R. 315). We affirm
the appellate court.

BACKGROUND
For the limited purpose of this appeal, the underlying allegations
of the common law fraud claim are not disputed. At this stage of the
proceeding, Kleinwort accepts the allegations as true. In order to provide
a more complete understanding of the litigation, we provide a summary
of the factual background of the case. We address only those facts
necessary to resolve the issue raised by the parties.
Quantum is a futures commissions merchant. In 1991, Quantum
became interested in purchasing Virginia Trading Corporation (VTC),
a brokerage firm. At the time, VTC was owned by Kleinwort. On May
31, 1991, Quantum offered to purchase 100% of the stock of VTC for
roughly $6 million in cash and commissions. Kleinwort accepted. The
parties executed a stock purchase agreement on June 30, 1991, wherein
Quantum agreed to purchase all of the stock of VTC. The closing date
was set for July 31.
Before the closing, two of VTC's salesmen left VTC, taking some
of their accounts with them. According to Quantum, these departures
drastically reduced the value of VTC. Quantum allegedly learned of the
departure of one of these salesmen after the closing. By this time,
Quantum had already paid nearly $6 million to Kleinwort in connection
with the purchase. The departures form the crux of the litigation in the
circuit court.
On August 14, 1992, Kleinwort filed a complaint against
Quantum. For the purpose of this appeal, the pertinent allegations of
the complaint sought a declaratory judgment to establish that Kleinwort
had not breached the stock purchase agreement or made a material
misrepresentation regarding the departures of the two VTC salesmen.
In response, on October 26, 1992, Quantum filed an answer and
counterclaims. The pertinent counterclaim was a claim alleging common
law fraud and seeking both compensatory and punitive damages.
On January 14, 1994, while the action was pending in the circuit
court, all of Quantum's outstanding stock was sold by its two
shareholders, Leslie Rosenthal and J. Robert Collins. At the time of this
stock sale, Quantum's rights in this litigation were assigned by written
agreement to former shareholders Rosenthal and Collins, individually.
Quantum agreed to cooperate fully with the assignees in the prosecution
and defense of the litigation. Thus, after the assignment, former
shareholders Rosenthal and Collins, as assignees of Quantum, became
the real parties in interest in the litigation.
In 1995, Kleinwort filed a motion for summary judgment. The
circuit court granted summary judgment in favor of Kleinwort on all of
Quantum's pending counterclaims, including the fraud counterclaim.
This ruling disposed of all pending counterclaims assigned by Quantum
to Rosenthal and Collins. The remainder of the action was dismissed as
moot. Quantum appealed.
The appellate court reversed the circuit court's order of summary
judgment in favor of Kleinwort and remanded the matter to the circuit
court for further proceedings on all of the counterclaims. The appellate
court also allowed Quantum's assignees to seek punitive damages on the
common law fraud counterclaim. The court briefly stated that assignees
of fraud claims have been allowed to seek punitive damages. 285 Ill.
App. 3d at 213. The only issue appealed to this court is whether the
assignees can recover punitive damages on the common law fraud
counterclaim.

ANALYSIS
In the instant appeal, the primary facts are not in dispute and the
parties raise a question of law. Accordingly, our review is de novo. See
Lucas v. Lakin, 175 Ill. 2d 166, 171 (1997); Jacobson v. Department of
Public Aid, 171 Ill. 2d 314, 323 (1996).
Kleinwort does not contest the assignment of the underlying
common law fraud claim and the assignees' right to recover
compensatory damages if the allegations should be proven. Kleinwort
only contests the right of the assignees of the underlying fraud claim to
recover punitive damages following such an assignment. Kleinwort
argues that the assignees may not seek punitive damages after an
assignment for two reasons. First, Kleinwort argues that, in order to
determine if an action is assignable, this court must determine if an
action would have survived the death of the claimant such that it could
be pursued by the claimant's estate. Kleinwort argues that punitive
damages do not survive the death of a claimant and therefore they are
not assignable. Second, Kleinwort argues that, even assuming that
punitive damages survive, the assignment of punitive damages should
not be allowed because to do so would violate public policy.

I. Survivability
At common law, many actions were neither assignable nor
survived the death of a claimant. Eventually, however, the law in this
area changed and provided that certain actions would survive the death
of a claimant and pass to the claimant's estate. Annotation,
Assignability of Claim in Tort for Damage to Personal Property, 57
A.L.R.2d 603, 605 (1958). In turn, the personal representatives of a
decedent were essentially perceived as assignees of the decedent's
property. North Chicago Street R.R. Co. v. Ackley, 171 Ill. 100, 105
(1897); 57 A.L.R.2d at 605. Thus, historically, survivability and
assignability were treated similarly because, in both instances, a claim
was being transferred from one entity to another. Based on this
historical development, in determining assignability, this court has
considered whether the action would survive the death of the owner. See
Wilcox v. Bierd, 330 Ill. 571, 585 (1928), overruled on other grounds,
McDaniel v. Bullard, 34 Ill. 2d 487 (1966); Olson v. Scully, 296 Ill. 418,
422 (1921); Selden v. Illinois Trust & Savings Bank, 239 Ill. 67, 78
(1909); Ackley, 171 Ill. at 105.
Kleinwort argues that punitive damages would not have survived
the death of the claimant. Kleinwort relies on the Survival Act, which
was codified at section 27--6 of the Probate Act of 1975 at the time this
action was filed (755 ILCS 5/27--6 (West 1994)). The Survival Act
provided:
"In addition to the actions which survive by the
common law, the following also survive: actions of replevin,
actions to recover damages for an injury to the person
(except slander and libel), actions to recover damages for
an injury to real or personal property or for the detention
or conversion of personal property, actions against officers
for misfeasance, malfeasance, nonfeasance of themselves or
their deputies, actions for fraud or deceit, and actions
provided in Section 6--21 of `An Act relating to alcoholic
liquors.' " (Emphasis added.) 755 ILCS 5/27--6 (West 1994).
Under the Survival Act, most causes of action, including fraud actions,
survive the death of a person. The estate may bring such actions on the
decedent's behalf.
Although the Act does not address punitive damages explicitly,
this court has held, in three cases involving personal injury claims, that
punitive damages do not generally survive under the Survival Act. See
Ballweg v. City of Springfield, 114 Ill. 2d 107 (1986); Froud v. Celotex
Corp., 98 Ill. 2d 324 (1983); Mattyasovszky v. West Towns Bus Co., 61 Ill. 2d 31 (1975). In Mattyasovszky, 61 Ill. 2d at 33-34, this court stated that
recovery under the Survival Act has historically been limited to
compensatory damages and that the language of the Survival Act and
decisions construing it have emphasized the compensatory nature of the
damages available. But see National Bank v. Norfolk & Western Ry. Co.,
73 Ill. 2d 60 (1978) (punitive damages could be recovered under Survival
Act because the underlying action was predicated on an act, the Public
Utilities Act, that specifically authorized the recovery of punitive
damages). This court further stated that any expansion of the Survival
Act to allow the survival of punitive damages is the responsibility of the
legislature and not the courts. Ballweg, 114 Ill. 2d at 117-18; Froud, 98 Ill. 2d at 335.
In response, Quantum and the assignees (hereinafter, the
assignees) raise two arguments. First, they argue that the cases
involving the Survival Act all involved personal injury claims and the
holdings of those cases should be limited to personal injury claims. The
assignees do not ask that we reconsider the underlying reasoning of
these cases or their interpretation of the Survival Act, and we do not
address their logic and continuing viability at this time.
Second, the assignees argue that the Survival Act should not
apply. Under a survivability analysis, the pertinent inquiry is whether
punitive damages would survive the death of the original claimant. In
the instant case, the entity originally bringing the fraud claim was
Quantum, a corporation. Claims by and against corporations are
governed by a different statute, for purposes of survival, than are claims
by and against individuals. The Survival Act is part of the Probate Act;
it does not apply to corporations. Thus, the assignees argue that the
more appropriate inquiry in the instant case is whether a claim for
punitive damages survives the dissolution of the corporation under the
Business Corporation Act of 1983.
Section 12.80 of the Business Corporation Act of 1983 specifically
governs the survival of remedies upon the dissolution of a corporation.
It provides, in pertinent part:
"The dissolution of a corporation *** shall not take
away nor impair any civil remedy available to or against
such corporation, its directors, or shareholders, for any
right or claim existing, or any liability incurred, prior to
such dissolution if action or other proceeding thereon is
commenced within five years after the date of such
dissolution." (Emphasis added.) 805 ILCS 5/12.80 (West
1994).
This type of statute is called a corporate survival statute. People v.
Parker, 30 Ill. 2d 486, 489 (1964); see also Poliquin v. Sapp, 72 Ill. App.
3d 477, 481 (1979); Canadian Ace Brewing Co. v. Joseph Schlitz Brewing
Co., 629 F.2d 1183, 1188-89 (1980). It extends the life of a corporation
in order to allow suits to be brought by or against a corporation.
Blankenship v. Demmler Manufacturing Co., 89 Ill. App. 3d 569, 574
(1980); Poliquin, 72 Ill. App. 3d at 481. These suits would otherwise
abate. Blankenship, 89 Ill. App. 3d at 574; Poliquin, 72 Ill. App. 3d at
481. The plain language of the statute provides that all civil remedies
available to a corporation survive dissolution.
Although the Survival Act, as contained in the Probate Act, has
been interpreted to prohibit punitive damages, the assignees argue that
corporations are treated differently pursuant to the Business
Corporation Act of 1983. They argue that, in determining the
assignability of punitive damages, the proper approach is to determine
whether a claim would survive a corporation's dissolution.
A few courts have addressed survivability in determining whether
punitive damages may be recovered following an assignment. They have
reached opposite conclusions. In Grunloh v. Effingham Equity, Inc., 174
Ill. App. 3d 508 (1988), a corporation attempted to assign its claim for
property damage to certain third parties. The appellate court noted that,
under the Business Corporation Act of 1933, "a corporation has power
`[t]o sell and convey, mortgage, pledge, lease as lessor, and otherwise
dispose of all or any part of its property and assets.' " Grunloh, 174 Ill.
App. 3d at 518, quoting Ill. Rev. Stat. 1981, ch. 32, par. 157.5(e). This
power to dispose of property includes generally the power to assign a
cause of action to others. Grunloh, 174 Ill. App. 3d at 518. The Grunloh
court, however, then determined that punitive damages could not be
recovered even though the underlying property damage claim itself could
be assigned. See Grunloh, 174 Ill. App. 3d at 518-19. The appellate court
based its conclusion on the fact that punitive damages are not
recoverable under the Survival Act. Although the court acknowledged
the corporate survival statute, it nevertheless applied the cases that had
construed the Survival Act, which is part of the Probate Act.
The federal court, however, reached the opposite result in Federal
Deposit Insurance Corp. v. W.R. Grace & Co. 691 F. Supp. 87 (N.D. Ill.
1988), aff'd in part & rev'd in part on other grounds, 877 F.2d 614 (7th
Cir. 1989). In Grace, a bank assigned its fraud claim to the Federal
Deposit Insurance Corporation. The federal court held that a fraud
action, which included punitive damages, could be assigned in its
entirety. The court distinguished the cases interpreting the Survival Act
on the basis that they all involved personal injury claims. The court
stated that, for the purpose of assignability, Illinois generally
distinguishes between torts to the person, which are not assignable, and
torts to property, which are assignable. Grace, 691 F. Supp. at 92. The
Grace court found that fraud claims are assignable. The court then
noted that punitive damages "are a type of relief which is part and
parcel of the underlying cause of action and do not constitute an
independent basis of recovery." Grace, 691 F. Supp. at 92, citing 1 J.
Ghiardi & J. Kircher, Punitive Damages Law & Practice ch. 6, sec. 6.16,
at 67 (1988). Thus, when the fraud action was assigned, the
corresponding punitive damages were transferred as part of the
assignment.
After considering these survival statutes and cases, we decline to
apply the survival analogy to the instant case. As stated in Grace,
punitive damages are a component of the relief available in an action
and are therefore deemed a part of the underlying action. Punitive
damages are a type of relief, not an independent cause of action. Kemner
v. Monsanto Co., 217 Ill. App. 3d 188, 199 (1991); McGrew v. Heinold
Commodities, Inc., 147 Ill. App. 3d 104, 110 (1986). This court long ago
used the survival analogy when considering whether a cause of action
is assignable, not whether punitive damages standing alone are
assignable. This court has not applied the survival analogy to invalidate
part of an assignment where the parties sought an assignment of the
entire action.
In addition, application of the survival analogy to assignments
may lead to unusual results. It would make little sense to create one
assignment rule for corporations and a different rule for individuals
based on the language and construction of different survival statutes.
The survival analogy does not provide a principled analysis to determine
if punitive damages are assignable in different situations involving
different types of assignors and claims.

II. Public Policy
A more significant consideration in determining the assignability
of causes of action in general has been whether such assignments would
violate public policy. This court has held that a cause of action cannot
be assigned if such assignment violates public policy, even if such an
action would otherwise survive the death of the owner. See Ackley, 171 Ill. 100 (personal injury actions and other actions of a personal nature
are not assignable, even though such actions survive the death of the
owner). Courts have considered public policy in determining if an action
is assignable. See Puckett v. Empire Stove Co., 183 Ill. App. 3d 181, 191-
92 (1989) (assignment of contribution action does not violate public
policy); Daugherty v. Blaase, 191 Ill. App. 3d 496 (1989) (insurance
malpractice claim is assignable because the business relationship
between an insurance broker and a client is not personal); Christison v.
Jones, 83 Ill. App. 3d 334 (1980) (legal malpractice claim is not
assignable because of the personal nature of the attorney-client
relationship); see also Town & Country Bank v. Country Mutual
Insurance Co., 121 Ill. App. 3d 216, 218 (1984).
Today, assignability is the rule and nonassignability is the
exception. 6 Am. Jur. 2d Assignments secs. 7, 29 (1963). Basically, in
Illinois, the only causes of action that are not assignable are torts for
personal injuries and actions for other wrongs of a personal nature, such
as those that involve the reputation or feelings of the injured party. See
Ackley, 171 Ill. at 111. These limitations are based primarily on public
policy concerns. Similarly, we find that the question of whether punitive
damages may be recovered following an assignment should be
determined primarily by public policy.
Kleinwort argues that the agreement, in which Quantum assigned
its rights in the litigation to its former shareholders, violates public
policy to the extent it allows the assignees to seek punitive damages.
Kleinwort argues that such assignments would allow a litigious person
to harass and annoy others by purchasing and pursuing such claims.
Kleinwort argues that punitive damages would become a "commodity in
trade" in Illinois. According to Kleinwort, allowing such assignments
would encourage private wars between strangers for the purpose of
obtaining the windfall of punitive damage awards. Kleinwort relies
primarily on Ackley, 171 Ill. at 111, in which this court held that
personal injury actions were not assignable based on public policy.
Kleinwort equates punitive damages with personal injury claims.
Kleinwort argues that punitive damages are generally disfavored in the
law and should not be recoverable following an assignment.
Some general principles that determine when an agreement
between parties violates public policy follow. The public policy of Illinois
is found in its constitution, its statutes, and the decisions of its courts.
O'Hara v. Ahlgren, Blumenfeld & Kempster, 127 Ill. 2d 333, 341 (1989);
Roanoke Agency, Inc. v. Edgar, 101 Ill. 2d 315, 327 (1984); McClure
Engineering Associates, Inc. v. Reuben H. Donnelley Corp., 95 Ill. 2d 68,
71-72 (1983). In deciding whether an agreement violates public policy,
courts determine whether the agreement is so capable of producing
harm that its enforcement would be contrary to the public interest.
O'Hara, 127 Ill. 2d at 342. The courts apply a strict test in determining
when an agreement violates public policy. J&K Cement Construction,
Inc. v. Montalbano Builders, Inc., 119 Ill. App. 3d 663, 683 (1983). The
power to invalidate part or all of an agreement on the basis of public
policy is used sparingly because private parties should not be needlessly
hampered in their freedom to contract between themselves. First
National Bank v. Malpractice Research, Inc., No. 82787, slip op. at 10-11
(December 18, 1997). Whether an agreement is contrary to public policy
depends on the particular facts and circumstances of the case. O'Hara,
127 Ill. 2d at 341-42; see also Telenois, Inc. v. Village of Schaumburg,
256 Ill. App. 3d 897, 901 (1993); Laughlin v. France, 241 Ill. App. 3d
185, 197 (1993).
Based on the facts and circumstances of the instant case, allowing
the assignees to seek punitive damages does not violate any public
policy. The assignees, Rosenthal and Collins, were Quantum's
shareholders at the time of the alleged fraud. Rosenthal was intimately
involved in the negotiations for the purchase of VTC, which serves as
the basis for the alleged fraud. Contrary to Kleinwort's arguments,
Rosenthal and Collins did not shop around for the fraud claim. They
were involved in the litigation long before Quantum's claims were
assigned to them. See Puckett, 183 Ill. App. 3d at 191-92 (assignment of
contribution claim did not violate public policy where assignee was
closely involved in the events leading up to the litigation).
In addition, we note that punitive damages generally serve to
punish a wrongdoer and to deter the wrongdoer and others from
committing similar acts in the future. See, e.g., Kelsay v. Motorola, Inc.,
74 Ill. 2d 172, 186 (1978). These purposes are served in the instant case
whether Quantum seeks such damages or whether its assignees seek
such damages. The same defendants are involved regardless of the
assignment. Accordingly, the recovery of punitive damages following
Quantum's assignment of the action to Rosenthal and Collins to the
extent it allows the recovery of punitive damages does not violate public
policy.

CONCLUSION
We hold that the former shareholders of Quantum may properly
seek punitive damages after Quantum's assignment of the fraud claim
to them. For the foregoing reasons, the judgment of the appellate court
is affirmed.

Appellate court judgment affirmed.