On Monday, June 4, 2012, the Seventh Circuit Court of Appeals issued its decision in James Nation v. American Capital, Ltd. Nation was previously the CEO of The Spring Air Company. He left Spring Air in 2007 and received a severance package worth about $1.2 million payable over a period of 15 months. Spring Air subsequently paid Nation about $836,000 under that agreement. However, before it could pay Nation the remainder of the severance payments, Spring Air ran into financial trouble. As a result, it suspended Nation’s severance payments (as well as those of several other former company executives) in order to preserve cash for operations. In response, Nation sued Spring Air’s majority shareholder and primary creditor, American Capital, for directing the suspension of his severance payments and thereby tortiously interfering with his severance agreement.
The Seventh Circuit observed that “Illinois recognizes a conditional privilege to interfere with contracts ‘where the defendant was acting to protect an interest which the law deems to be of equal or greater value than the plaintiff’s contractual rights.’” The Court explained that “[t]he basis for the privilege is the business-judgment rule. Because the interests of corporate officers, directors, and shareholders are sufficiently aligned with those of the company, they generally cannot be liable in tort where they interfere with the company’s contracts for the benefit of the company.” Applying this rationale, the Court held that “[a]s Spring Air’s majority shareholder with control of a majority of its directors, American Capital was conditionally privileged to interfere with the company’s contracts, including its severance agreement with Nation.” The Court also held that “There is no evidence that would permit a reasonable jury to conclude that American Capital induced the breach of Nation’s severance agreement to further its own interests or to injure him, or that doing so was contrary to Spring Air’s interests.” Notably, the Court also recognized that “[a]part from its status as a majority equity holder, American Capital’s actions may also be privileged based on its status as a creditor of Spring Air” because “a creditor ‘competing for payments from the same cash-strapped debtor’ can use reasonable means to obtain payment on its contract, including conduct that induces the debtor to breach its contract with another.” As a result, the Court affirmed the District Court’s decision granting American Capital’s motion for summary judgment.