Is It Possible to Recover Punitive Damages After Assigning Lawsuit Interest to Shareholders ?
In Kleinwort Benson North America, Inc. v. Quantum Financial Services, Inc., 181 Ill. 2d 214, 692 N.E.2d 269, 229 Ill. Dec. 496 (1998), Kleinwort sued Quantum and Quantum counterclaimed, asserting common-law fraud and seeking punitive damages in connection with the sale of a brokerage firm.
During the pendency of the litigation, Quantum assigned its interest in the lawsuit to its two shareholders. Kleinwort challenged the shareholders' standing to pursue the punitive damages claim.
The supreme court held that the assignees could recover punitive damages on the common-law fraud counterclaim. Kleinwort, 181 Ill. 2d at 226.
The court noted that, traditionally, courts examined the assignability issue by considering whether the action would survive the death of the owner. Kleinwort, 181 Ill. 2d at 220.
The supreme court rejected this approach, concluding that the "primary" consideration in determining the assignability of causes of action is whether such assignments would violate public policy. Kleinwort, 181 Ill. 2d at 224 ("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").
The court criticized the survival analogy, noting:
"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." Kleinwort, 181 Ill. 2d at 224.
The court further noted that "assignability is the rule and nonassignability is the exception." Kleinwort, 181 Ill. 2d at 225.
It stated that, 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." Kleinwort, 181 Ill. 2d at 225.
After further noting that the issue depends on the facts and circumstances of the case and that courts apply a strict test in determining whether an assignment violates public policy, the court held that allowing the assignees to seek punitive damages did not violate public policy. Kleinwort, 181 Ill. 2d at 226.
The court found significant that the assignees were Quantum's shareholders at the time of the alleged fraud, that one shareholder-assignee was intimately involved in the negotiations for the purchase of an entity that served as the basis for the alleged fraud, that the assignees did not "shop around" for the fraud claim, and that the same defendants would be involved regardless of the assignment. Kleinwort, 181 Ill. 2d at 226-27.