A Chicago appellate court has ruled a confidentiality agreement between an uncle and his nephew, who were both in the hotel business, can't be invoked by the uncle, because the agreement's purpose was to allegedly hide violations of federal banking law allegedly made on loan applications to buy hotels in the suburbs.
The July 28 decision was delivered by Justice Joy Cunningham, with concurrence from Justices Mathias Delort and Thomas Hoffman, of Illinois First District Appellate Court. Their ruling upheld a decision by Cook County Circuit Judge Patrick Sherlock, which dismissed litigation brought by Richard Signapori against his nephew, Jignesh Jagaria.
Signapori and Jagaria co-owned two corporations, Eshaan and Novak, with Signapori owning 51 percent of both corporations and Jagaria owning 49 percent. In summer 2011, they took out loans through Eshaan totaling $2.3 million from International Bank of Chicago and SomerCor 504, a non-profit development company, to buy a Red Roof Inn in suburban Deerfield. The loans were guaranteed by the U.S. Small Business Administration.
In summer 2012, they applied for similar loans from the same institutions through the Novak corporation, totaling $2 million, to buy a Red Roof Inn in suburban Lansing. While the financing was pending, Signapori and Jagaria squabbled. To move forward with the financing, they agreed to have Signapori take 100 percent ownership of Eshaan and Jagaria to take over Novak. The agreement was to be confidential.
The financing went ahead, with Signapori signing loan documents saying he was still part of the Novak corporation, according to court papers.
One condition of obtaining the loans, was Signapori and Jagaria would obtain approval from the lenders before changing the ownership structure of their two corporations. Failing to do so could result in default on the loans.
Jagaria then became involved in a legal dispute in India, during which Jagaria told his mother, an Indian judge and a lawyer that he had sold his interest in the Deerfield hotel, and he and Signapori were no longer in business together, according to court documents.
Signapori responded with a suit against Jagaria for allegedly breaching the confidentiality agreement, seeking $600,000 in damages per the liquidated damages clause of the agreement. Jagaria moved to dismiss the suit, contending the clause should not be applied, because it improperly serves as a penalty and further, that Signaporia failed to allege actual damages.
However, Judge Sherlock threw out the case on grounds not raised by Jagaria, namely the agreement was unenforceable, because the "confidentiality provision in the parties’ contract was drafted with one purpose in mind — to keep prior and continuing misrepresentations to the SBA lenders secret.”
Signapori appealed, arguing the agreement did not break banking laws.
Justice Cunningham disregarded Signapori's argument, agreeing with the circuit judge that the contract was void, because it had a nefarious purpose.
"There is no question that the effect of the 'Agreement,' executed on September 19, 2012, worked a substantial economic injury to the IBC, SomerCor, and the SBA, and was in violation of state
and federal law. Not only do the plaintiffs candidly admit in their amended complaint that
Jagaria made several false statements on the loan applications," but exhibits attached to the lawsuit "reveal that Signapori himself engaged in deceptive and fraudulent acts," Cunningham said.
Cunningham further noted if justices upheld the Signapori-Jagaria contract, the justices would be helping to support the alleged scam.
"To hold the parties bound by their contractual obligation to maintain silence would in this case require this court to assist the plaintiffs in concealing their fraudulent misrepresentations to the IBC and SomerCor in violation of state and federal law.
"Regardless of whether the parties’ conduct constitutes a federal crime, the injury inflicted upon the third-party banks is the same. It is this injury that the law has an interest in correcting. We will not enforce a contract that purports to bar a party - here, Jagaria - from reporting another party’s alleged misconduct," Cunningham observed.
Jagaria had also wanted his attorney fees paid by Signapori, but the circuit judge refused. Jagaria appealed this point, but Justice Cunningham also refused, pointing out the parties were "jointly engaged in an enterprise that was illegal" and "are equally at fault for entering into the 'Agreement.' We will not aid either party but instead leave them where we found them."
Singapori is represented by Ashman Law Office, of Chicago. Jagaria is defended by the Oak Brook firm of Sullivan Hincks, according to Cook County court records.