Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ill.: Accounting brokerage agreement was terminable at will, (Oct 31, 2013)

By Peter Reap, J.D., LL.M.

The agreement between Accounting Practice Sales, Inc. (APS), and William Burford, pursuant to which Burford agreed to become a broker of accounting practices for APS, was terminable at will under Illinois law, the federal district court in Benton, Illinois, has decided (Burford v. Accounting Practice Sales, Inc., October 29, 2013, Gilbert, P.). Thus, Burford’s claim for breach of contract failed. Because Burford’s breach of contract claim failed, his claim for piercing the corporate veil also failed.

Although Burford argued in pleadings that the Illinois Franchise Disclosure Act (IFDA) applied to the parties’ agreement, the court declined to address that argument because he did not allege a claim for violation of the IFDA.

Background. Gary Holmes formed and is currently the sole shareholder and officer of APS. APS is engaged in marketing accounting practices. APS contracts with brokers and assigns them territories in which to obtain listings for accounting practices that are for sale.

Burford and APS entered into an agreement in March of 2003, which gave Burford the exclusive right to broker accounting practices in Louisiana on behalf of APS. The agreement stated that it was for a term of 12 months and renewed automatically. It also stated that it could be terminated by Burford at any time on 30 days’ notice, and that APS could not terminate the agreement unless it was violated by Burford. APS, verbally through APS’s agents, later assigned Burford the additional territories of Alabama, Mississippi, Tennessee, and Kentucky.

Burford expended funds in furtherance of APS’s business and paid commissions to APS for the accounting practices he sold. On or about January 15, 2012, Holmes sent Burford an e-mail notifying Burford that he was terminated from brokering practices in all of his territories.

Burford brought suit against Holmes and APS, alleging two claims: (1) breach of contract, and (2) piercing of the corporate veil.

Breach of contract. The defendants argued that they were entitled to summary judgment because the written agreement and the oral agreements were for an indefinite duration, and therefore, terminable at will. The critical issue in this case was whether the agreement between APS and Burford was terminable at will, the court noted. When a contract is terminable at will, it could be terminated by either party and for any reason.

The contract in question is of indefinite duration. The agreement provides that it “is effective on the date signed…and continues for a period of twelve months. After that time, it renews automatically on each anniversary date of this agreement for another period of twelve months.”

The contract in this case renewed itself without Burford or APS having to take any action or having to refrain from taking action. While the contract purports to renew itself for “period[s] of twelve months,” the use of these words did nothing, according to the court. If this wording were removed, the contract would still have the same effect; APS would be eternally locked into the agreement. The contract provided no manner in which the renewal could be stopped. The contract, as it is worded, would continue indefinitely. Therefore, the contract is of indefinite duration, the court determined.

“If a party was in ‘complete control’ or ‘could institute a termination-triggering event, then the contract should be considered terminable at will.’” Profile Prods., LLC, 155 F. Supp. 2d at 883 (citing Yale Sec., Inc. v. Freedman Sales, Ltd., No. 96 C 6501, 1997 WL 51428, at *3 (N.D. Ill. Feb. 3, 1997). Burford could, at his will, terminate the contract at any time and apparently for any reason as long as he provided a thirty day written notice. Therefore, Burford had complete control as to when he could terminate the contract. Accordingly, this does not take the contract out of being one that is terminable at will.

However, the agreement also stated that “APS cannot terminate this agreement unless it is violated by Burford.” Under this provision, APS could only terminate if Burford breached. The Illinois Supreme Court has determined that “any contract is terminable upon the occurrence of a material breach,” the court noted.

Burford argued that this case was similar to the facts in Dawson v. W & H Voortman, Ltd., 853 F. Supp. 1038 (N.D. Ill. 1994). In Dawson, on a motion to dismiss, the defendant argued that the contract was terminable at will, because it did not “fix a time for its duration…” However, the defendant issued a policy manual instructing Dawson to “conduct his business according to the policies and procedures…in this handbook.” The District Court for the Northern District of Illinois found that “the policy manual sets forth what can be analogized to a ‘for cause’ termination clause.”

In the present case, APS could only terminate the agreement if Burford breached it. This was distinct from the facts of Dawson. In this case, there were no “for cause” provisions in the contract. Burford could terminate at any time he chose and for any reason. However, if Burford never breached the contract, APS had no manner in which to terminate the contract. Illinois case law clearly did not allow such an arrangement, the court held.

By stating that APS could terminate if Burford violated the agreement, the contract did nothing to avoid being found as a terminable at will contract, because any contract was terminable upon a material breach. The agreement did not provide a specific, objective event upon which the contract terminated. Therefore, the contract was terminable at will and the defendants’ motion for summary judgment on the breach of contract claim was granted.

Piercing the corporate veil. “The doctrine of piercing the corporate veil is an equitable remedy; it is not itself a cause of action but rather is a means of imposing liability on an underlying cause of action, such as a tort or breach of contract.” Fontana v. TLD Builders, Inc., 840 N.E.2d 767, 776 (Ill. App. 2d Dist. 2005). In the present case, Burford’s underlying cause of action was his breach of contract claim. Because that claim failed, Burford’s piercing the corporate veil claim, must also fail, the court ruled.

IFDA. In his response to the defendants’ motion for summary judgment, Burford argued that APS could terminate the agreement only if Burford violated it. He also argued that the IFDA prohibited APS, a franchisor, from terminating Burford, the franchisee, without “good cause.”

In Burford’s first amended complaint, he only referenced franchises in two instances, the court observed. First, he stated, “APS had recently begun seeking its brokers’ consent to a franchise arrangement for the brokers, and Burford was resistant to that plan.” Next, when arguing that APS’s corporate veil be disregarded, he stated “[b]y making the franchise agreements through APS II instead of APS, Gary Holmes has diverted the business operations, assets, and income of APS to APS II.”

A complete reading of Burford’s amended complaint suggested that APS had begun to enter into franchise agreements with its brokers and that Burford resisted such an action. Furthermore, Burford did not allege a claim against defendants for violating the IFDA. For these reasons, the court declined to address Burford’s arguments as to the applicability of the IFDA at this time.

The case is No. 12-CV-1212-JPG-SCW.

Attorneys: David Patrick Hall (Law Office of David Hall) for William J Burford. John F. Grady (Grady Bell LLP) for Accounting Practice Sales, Inc.

Companies: Accounting Practice Sales, Inc.

Cases: FranchisingDistribution IllinoisNews