Failure to Challenge Damages Expert Via Post-trial Motion Dooms Lawyer’s Attack on Legal Malpractice Jury Verdict

Midwest Mailing & Shipping Systems, Inc. v. Schoenberg, Finkel, Newman & Rosenberg, 2023 IL App (1st) 220562-U illustrates in sharp relief the consequences flowing from a failure to file a post-trial motion in a jury case and the latitude afforded a jury when it fashions a money damages award/

Plaintiff, a Wisconsin corporation licensed to do business in Illinois was the exclusive dealer for Neopost, a Wisconsin company that made and sold postage meters.

The plaintiff-Neopost agreement allowed the latter to terminate the exclusive arrangement if plaintiff assigned its dealership rights or abandoned its business.

After a dispute arose between plaintiff and Neopost, defendants advised plaintiff to terminate its Wisconsin incorporation, incorporate a new Illinois business, and assign the Wisconsin company’s business to the new Illinois entity. As a result, plaintiff alleged Neopost terminated the dealership agreement and financially gutted plaintiff’s business.

Plaintiff and Neopost then filed separate lawsuits in Illinois state court and New York Federal, respectively. The parties eventually settled and dismissed their competing lawsuits with Plaintiff receiving a payment of $300,000 to give up its “territorial exclusivity right” to sell and service Neopost’s postage meters.

Plaintiff then sued defendant law firm and two of its attorneys, Gambino and Goldberg for legal malpractice. Plaintiff’s damages expert opined that but for defendant’s legal malpractice, Neopost would have paid Plaintiff $2.73 million – some $2.4 million north of the settlement amount – for Plaintiff to give up its exclusive right to sell Neopost products.

After a jury trial, the jury sided with the law firm and attorney Gambino but entered a judgment against attorney Goldberg for $700,000.

On appeal, Goldberg argued that the Court improperly considered speculative damages testimony from Plaintiff’s expert. The Court found that Goldberg forfeited this argument on appeal. It cited Code Section 2-1202 states that if a party in a jury case fails to file a posttrial motion seeking a new trial, it waives the right to apply for a new trial. 735 ILCS 5/2-1202(e)(2020). (By contrast, Code Section 2-1203, governing bench trials, provides that a party may (but doesn’t have to) file a posttrial motion within 30 days after judgment.)

Since Goldberg did not file a posttrial motion challenging the jury verdict, he forfeited his arguments against the damages expert.

The Court rejected Goldberg’s argument that he preserved for appeal the issue of plaintiff’s damages expert’s testimony by raising a challenge to the testimony in an earlier summary judgment motion. This is because when a summary judgment motion is denied and a case proceeds to trial, the denial of summary judgment is not appealable since any error in denying summary judgment merges into the judgment entered at trial. [¶ 20]

The Court then rejected Goldberg’s argument that the jury verdict was too imprecise. The Court cited well-settled Illinois law that a jury verdict amount is generally at the jury’s discretion and is only required to be based on a fair degree of probability and is not subject to “precise determination.” [¶ 25]

Here, the plaintiff’s expert opined that but-for Goldberg’s legal malpractice, plaintiff lost out on an approximate $2.4 million payout to release its territorial exclusivity right. The jury, by only allowing a fraction of the claimed damages, clearly did not fully credit the expert’s testimony.

Lastly, the Court found that the evidence introduced at trial supported the jury’s $700,000 verdict. It credited the testimony that the sale of Neopost’s postal machine products accounted for the majority of plaintiff’s business, that plaintiff planned to ask for a $5 million payment in exchange for release of territorial exclusivity rights several years before trial, and that a Neopost witness testified that it likely would have paid $600,000 for plaintiff to cede its exclusivity rights. In the aggregate, according to the Court, the plaintiff introduced sufficient evidence to support the jury’s verdict.

Case Lessons:

A failure to raise an issue in a post-trial motion can result in forfeiture of the issue on appeal;

A jury is given wide berth in terms of damages it can award. A damages verdict does not require mathematical precision; all that’s required is there be a reasonable basis for the verdict; and

Jury damage award will not easily be overturned. All that is required is that the money verdict establish, with a fair degree of probability, a basis for computation of damages.

 

Business Broker Wins Contract Suit Against Accountant: Special Concurrence Chides Overuse of Adverbs in Briefs

APS v. Sorkin, 2023 IL App (1st) 211668-U considers some important issues that recur in breach of contract litigation and features an appellate judge urging lawyers to excise superfluous adverbs from their legal briefs.

The business broker plaintiff sued an accountant for damages after he sold his practice to a buyer introduced by the plaintiff during the term of a written agreement between the parties.

The plaintiff sought 10% of the sale fee plus attorneys’ fees. The trial court granted summary judgment for the plaintiff and the defendant appealed.

Affirming the judgment, the First District first noted that a party seeking to enforce a contract must prove it substantially complied with the material terms of an agreement. Conversely, a party who materially breaches a contract cannot recover damages from the non-breaching party.

The defendant argued that plaintiff breached the contract by refusing to request updated letters of intent (LOIs) from prospective buyers of the practice and by unilaterally terminating the contract.

The court rejected both arguments. It first noted that the subject contract gave plaintiff the exclusive right to market defendant’s accounting practice for a 90-day period with 15-day automatic renewal terms.

The contract did not require plaintiff to employ specific marketing techniques such as soliciting additional LOIs from prospects. It only obligated the plaintiff to facilitate the sale of the accounting business by marketing it and locating potential buyers. As a result, the Court found that plaintiff did not breach the agreement by refusing defendant’s request to obtain new LOIs from prospects. [¶ 25]

The Court also rejected the defendant’s claim that plaintiff breached by terminating the contract. Defendant cited language in the contract that apparently provided him with sole right to terminate. The Court noted that perpetual contracts or ones of indefinite duration are disfavored and terminable at the will of either party. Since the Court found that the contract did not give defendant an exclusive termination right, it held that the plaintiff did not breach by unilaterally ending the contract once the initial 90-day term expired. [¶ 27]

Defendant also claimed the contract was unenforceable under Section 10-30 of the Business Broker Act, 815 ILCS 307/10-30(a)(the “BBA”). The BBA, among other things, requires a business broker (like plaintiff) to provide a written disclosure document to a client at the time or before a client signs a contract for services.

Plaintiff’s agent signed an affidavit stating that he supplied defendant with the required disclosure document more than three months before the contract was signed. Since defendant did not oppose this affidavit, plaintiff’s testimony was taken as true by the Court when ruling on plaintiff’s summary judgment motion.

Next, the Court affirmed the trial court’s denial of the defendant’s motion for leave to amend his affirmative defenses.

Defendant sought to file amended affirmative defenses of Plaintiff’s material breach and failure to comply with the BBA. However, since the record evidence demonstrated that Plaintiff did not materially breach the contract by terminating it and Defendant did not challenge Plaintiff’s affidavit testimony that it provided the required BBA disclosure document, Defendant’s proposed defenses would not cure any pleading defects. [¶ 37]

Judge Hyman’s special concurrence (¶¶ 41-47) takes the litigants’ attorneys to task for peppering their briefs with intensifiers (adverbs or adjectives used to lend force or emphasis to a word’s meaning). He takes special aim at counsels’ overuse of the words “clearly”, “merely”, “woefully” and “certainly” (think “Plaintiffs have clearly failed to meet their burden of proof here”) and notes a Supreme Court Justice’s (Roberts), a celebrated novelist’s (Stephen King) and a prolific legal writing scholar’s (Brian Garner) mutual disdain for adverbs.

In Hyman’s view, the singled-out adverbs hamper rather than help an author’s prose and detract from her message.

Afterwords:

Sorkin’s case lessons include the contract law principle that a party’s termination of an indefinite contract is not a material breach unless the contract specifies that it can be terminated only for a specific reason or upon the happening of a described event.

The case also makes clear that unchallenged affidavit testimony in support of a summary judgment will be taken as true. A party opposing summary judgment must file counter-affidavits to contradict the movant’s version of events.

Lastly, Sorkin solidifies the proposition that the denial of an amendment to a pleading is proper where it’s clear that a proposed, amended pleading will not cure a defect in an earlier pleading.

 

Non-Member of LLC Lacks Standing to Pursue Statutory and Common Law Claims against LLC Manager – IL First District

Doherty v. Country Faire Conversion, LLC, 2020 IL App (1st) 192385, a dispute concerning a limited liability company (LLC) provides a useful summary of the difference between a company (a) member and (b) transferee of a member’s economic company interest and the financial impact flowing from that distinction.

The plaintiff purchased what she believed was a 25% interest in the LLC at a foreclosure sale for $20,000. Plaintiff claimed that her quarter-interest in the LLC was worth nearly $2M based on the capital contribution made by the entity whose interest Plaintiff purchased.

Plaintiff sued when the LLC sold its lone asset for approximately $5M and refused to distribute any of the sale proceeds to the Plaintiff.

Plaintiff filed suit for declaratory relief, equitable accounting, and breach of fiduciary duty against the LLC’s manager. Her declaratory judgment count sought a court order that she was a 25% member of the LLC, that she was entitled to 25% of the sale proceeds of the LLC’s asset, and that as a member she had a statutory right to inspect the LLC’s books and records.

The trial court entered partial summary judgment that the plaintiff did not own a membership interest in LLC but instead owned only an economic interest in the business. Because of this, the trial court later ruled that plaintiff lacked standing to pursue her accounting and breach of fiduciary duty claims and had no right to inspect the LLC’s books and records.

After a bench trial, the court ruled that the plaintiff held a 13.75% interest (as opposed to the claimed 25% interest) in the proceeds of the LLC’s asset sale and further reduced plaintiff’s share by the defendant LLC manager’s attorneys’ fees incurred in litigating the plaintiff’s claims.

Standing: The Member v. Transferee Difference

The First District affirmed the trial court’s finding that Plaintiff was not a member but had only a 13.75% interest in the sale proceeds and therefore lacked standing to sue for breach of fiduciary duty or to obtain an accounting of the LLC’s business records.

Rejecting the plaintiff’s breach of fiduciary duty claim, the Court noted that  Section 15-20 of the Illinois LLC Act, 805 ILCS 180/1-1 et seq. (the Act), permits an LLC member to sue the company, a manager, or another member for legal or equitable relief to enforce the member’s rights under (i) the operating agreement, (ii) the Act, and (iii) rights arising independently of the member’s relationship to the company.

The Act also provides that a transferee of a distributional interest in an LLC is not entitled to become or exercise rights of a member and has no related right to participate in the management or conduct of the LLC or to demand access to company information.  805 ILCS 180/15-20, 30-5, 30-10.

The Court found that under both the Act and the LLC’s amended operating agreement, plaintiff was only an Economic Interest Holder and not a member. As a result, plaintiff lacked standing to assert its breach of fiduciary duty and accounting claims against the manager and also could not demand production of company records or contest the trial court’s awarding attorneys’ fees to the manager based on indemnification language in the operating agreement.

Distribution of Plaintiff’s Share of LLC Asset Sale Proceeds

The First District also affirmed the trial court’s ruling that plaintiff had a 13.75% interest in the LLC’s profits and losses, as opposed to the 25% membership interest pressed by the plaintiff.

The Court looked to the plain language of the LLC’s amended operating agreement which specifically delineated the Plaintiff’s 13.75% interest in the LLC’s profits and losses.

The First District also affirmed the trial court’s ruling that the LLC manager’s expert witness was more believable than the plaintiff’s. The court ruled that the trial judge was in superior position to rule on the credibility of the parties’ warring expert witnesses and noted that the plaintiff’s expert’s opinions were based on the faulty premise that plaintiff was a 25% member of the LLC (as opposed to a 13.75% interest holder).

Afterwords:

Doherty cements Illinois courts’ continued recognition of the key distinction between a limited liability company’s member and economic interest holder. Only the former has standing to pursue statutory and common law claims against an LLC’s manager. The latter’s interest, by contrast, is relatively passive and consists only of a right to receive monetary disbursements.

Another case lesson is that business litigators should carefully parse the controlling operating agreement and the LLC Act when litigating claims involving LLC members or manager.

Other important take-aways include that a trial court’s finding on credibility of dueling expert witnesses is entitled to deference by an appeals court and attorneys’ fees are only awarded where a contract or statute so provides.

 

R. Kelly’s Royalty Account Nabbed by Sex Assault Judgment Creditor

Midwest Commercial Funding, LLC v. Kelly, 2022 IL App (1st) 210644 shows the harsh results that can flow from the failure to follow a statute’s service requirements to the letter.

There, dueling creditors fought over song royalties paid to disgraced R&B singer R. Kelly. Heather Williams sued the singer for sexual abuse and obtained a $4M default judgment against him in March 2020. About four months later, Midwest Commercial Funding, LLC (“MCF”), a commercial landlord, was awarded a $3.5M judgment for unpaid rent under a commercial lease against the singer.

Both creditors issued supplementary proceedings to enforce their respective judgments.

The Chronology

On August 17, 2020, Williams mailed a citation to discover assets to Sony – the music company that held a royalty account for the singer. Two days later, MCF sent its own citation by both regular mail and e-mail. MCF e-mailed the citation to one of Sony’s in-house lawyers with whom MCF had prior dealings.

On August 24, 2020, Sony’s in-house lawyer acknowledged receipt of MCF’s citation. (The record is unclear whether Sony’s counsel meant the August 19, 2020 e-mailed or regularly mailed citation.) August 24, 2020 is also the date that Williams mailed citation was delivered to Sony.

When MCF and Williams learned they had served simultaneous citations, they each filed adverse claims in their respective cases: Williams’s personal injury case and MCF’s lease breach action.

Trial Court Ruling

The trial court found that based on Supreme Court Rule 12(c), MCF’s electronic service was complete on day of transmission (August 19, 2020) while William’s “snail-mail” service was complete August 21, 2020 – four days after mailing. Because of this, the supplementary proceedings court found that MCF’s citation lien took precedence over Williams’s and ordered Sony to pay MCF (to the exclusion of Williams) until the judgment was satisfied.

The First District’s Reversal

Williams’s key argument on appeal was that she had a superior lien to Kelly’s royalty account as plaintiff’s e-mail citation did not perfect service under the law.

Reversing the trial court, the First District noted that once a citation is served on a judgment debtor, a judgment lien is perfected on all assets of the debtor that are not otherwise exempt under the law. The Court then wrote that when a citation is served on a third party, the judgment liens all assets of the debtor in the third party’s possession or control. A perfected lien is superior to any later-attaching lien. [Para 7]

The Court rejected MCF’s argument that Williams lacked standing to challenge service of MCF’s citation on Sony. It found Williams was not trying to vicariously assert Sony’s right to proper notice of the citations. Instead, Williams was asserting her prior interest in Kelly’s royalty account because Plaintiff’s e-mailed citation did not perfect service of its citation under Illinois law. The Court added that a contrary ruling would deprive any creditor of a chance to assert a paramount lien upon assets in a third-party respondent’s possession and allow a citation respondent to arbitrarily decide priority among competing creditors. [¶ 14]

The Court then analyzed Supreme Court Rule 11’s text to determine if e-mail service can perfect a citation lien. Under a plain reading of the Rule – titled “Manner of Serving Documents Other Than Process and Complaint on Parties Not in Default in the Trial and Reviewing Courts” – the Court found it contemplates e-mail service of documents only after a party has appeared. As a result, Rule 11 does not provide for e-mail service of documents on a party who has not appeared in the case before the court. Here, Sony had not appeared in either underlying case. [¶ 19]

Looking to Black’s Law Dictionary for guidance, the Court defined the “process” referenced in Rule 11’s title as an initiating case document, like a summons or writ, which triggers a party’s duty to respond.

The Court likened a third-party citation to discover assets to a summons. It held that “absent service of the citation, such party has no duty to appear, nor could the court subject such party to the sanctions provided in Section 2-1402 for noncompliance.”

Since the failure to respond to a third-party citation subjects a respondent to the threat of contempt and sanctions, the Court found that supplementary proceedings against a third party like Sony must be accompanied by service of process and statutory special notices. [¶ 20] As a result, MCF’s e-mailed citation was not proper service under Illinois law and did not lien the royalty account. Since Williams mailed her citation to Sony two days before MCF mailed its citation, Williams’s lien on the account trumped MCF’s.

Conclusion

This case illustrates in sharp relief how a judgment creditor plays with proverbial fire by not personally serving a citation (or at least serving it by certified mail – return receipt requested)

Since a citation to discover assets is the opening, operative document that first activates a recipient’s duty to respond, the citation is tantamount to a summons or writ and beyond the scope of Rule 11’s e-mail service provisions.

 

 

Missing Contingent-Fee Term Doesn’t Doom Law Firm’s Quantum Meruit Claim

Reversing a trial court’s dismissal of a law firm’s quasi-contract claims against a former client, the First District recently considered the enforceability of a contingency fee contract that was missing a material term.

The plaintiff law firm in Seiden Law Group, P.C. v. Segal, 2021 IL App (1st) 200877 sued the defendant, an ex-client, for quantum meruit and unjust enrichment to recover the value of its fees and costs incurred in a prior lawsuit.

Key Facts

In 2013, the client defendant hired the plaintiff law firm to petition the U.S. government in Federal court for the return of personal property the government confiscated after her ex-husband’s 2004 criminal racketeering conviction.

The contingent fee contract, drafted by the plaintiff firm, was silent on the percentage of recovery that would go to the firm if the suit was successful. It read: “_____% of recovered funds…. pursuant to a forfeiture resulting from a matter concerning [defendant’s ex-husband].” The contract also provided that in the event of discharge, the firm could recover pre-firing accrued fees and expenses advanced in the lawsuit.

In 2016, the client fired the law firm. At the time of its firing, the law firm had not recovered any property on the defendant’s (then, the plaintiff’s) behalf.

The law firm then sent defendant a bill for nearly $100,000 based on its assessed value of the legal services provided to the plaintiff in the case against the government. Plaintiff sued when defendant refused to pay under quantum meruit and unjust enrichment theories of recovery.

The basis for plaintiff’s claims was that since the underlying fee agreement was unenforceable since it was missing an essential price term, it could sue alternatively for quantum meruit and unjust enrichment.

The trial court dismissed the suit. It found that the existence of an express contract – the contingency agreement – precluded the law firm’s quantum meruit and unjust enrichment claims. That the contingent-fee contract was missing a recovery percentage, did not render the contract unenforceable. The trial court noted that courts routinely supplied missing price terms in a variety of contexts. And since the contract was enforceable, it defeated plaintiff’s claims.

Reversing, the First District first noted that under Illinois law, a contract’s material terms must be definite enough so that its terms are reasonably certain and able to be determined.

Where a contract lacks a term, a court can supply one where there is a reasonable basis for it. But where the absent term is essential or so uncertain that there is no basis for deciding whether an agreement has been kept or broken, there is no contract.

Illinois courts routinely scrutinize the reasonableness of attorney fees and contingent-fee contracts to ensure that collected fees are not excessive. Illinois courts have found contingency fees ranging from 25% – 40% to be reasonable. There are even statutory benchmarks for certain fee agreements. Code Section 2-1114 (735 ILCS 5/2-1114), for example, caps contingent agreements at 33.3% of total recovery in a medical malpractice case.

However, the Court held that in an arcane case involving recovery of assets seized by the government, there is no industry standard contingent fee amount. Because of this, the Court held that the trial court could not supply a missing percentage recovery term. [19-20]

The First District also noted the contingent-fee contract ran afoul of Illinois Rule of Professional Conduct 1.5(c) which requires that contingent-fee agreements specify the method by which the fee is to be determined, and the percentage accruing to the lawyer after trial or settlement. RPC 1.5(c) [21]

The Court ultimately found that the trial court should not have dismissed the plaintiff’s quantum meruit and unjust enrichment claims.

Quantum Meruit

In Illinois, a plaintiff can sue for quantum meruit where there is no enforceable contract between the parties. But quantum meruit is not available where the underlying contract is unenforceable as a matter of public policy; such as where a contract is illegal or violates a statute. The rationale is that a party to a contract that violates public policy should not be able to circumvent the offending contract by relying on quantum meruit.

But where a contract is unenforceable for violating an ethical rule that does not involve public policy, it will not bar quantum meruit recovery.

A contract only violates public policy where it “has a tendency to injure the public welfare.”  Here, the court found the omission of the percentage recovery an “innocuous omission” that was the product of “carelessness and sloppy contract formation.”  In the Court’s view, this did not rise to the level of a public policy violation. [28]

Because the contract’s missing percentage recovery term did not implicate public policy concerns, the First District held that the law firm could assert a successful quantum meruit claim. [24]

Unjust Enrichment

The Court then considered the Plaintiff’s unjust enrichment complaint count. To state a valid unjust enrichment claim in Illinois, a plaintiff must allege (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) absence of justification and (5) the absence of a remedy provided by law. [31]

While similar in that they both aim to provide a plaintiff with restitution where no contract exists, quantum meruit and unjust enrichment differ in their respective recoverable damages. The former measures recovery by the reasonable value of work and material provided while the latter considers the benefit received and retained because of the improvement provided.

The Court sustained plaintiff’s unjust enrichment claim for the same reason it found plaintiff’s quantum meruit cause was prematurely dismissed.

Afterwords:

Seiden Law’s lessons are many for commercial litigators. For one, a missing contractual term cannot always be supplied by a court; especially if contract involves specialized subject matter.

The case also makes clear that a breach of RPC 1.5’s contingency fee strictures will not automatically void a contract. It is only when an ethical violation rises to the level of a public policy breach, that a court will nullify a contract.

This case also solidifies the proposition that, when faced with an unenforceable contract that does not implicate public policy concerns, a plaintiff can still bring alternative and equitable claims for quantum meruit and unjust enrichment.

 

 

When The Unconscionability Doctrine Can Void A Contractual Provision – Illinois Law

I recently litigated the enforceability of a contractual arbitration provision contained in an electrical subcontract for work on a high-end residential project in the Chicago suburbs.  The subcontractor fighting arbitration argued that the clause, drafted by the general contractor, was so one-sided against it, that it was unconscionable under Illinois law. [Among other things, the arbitration provision shifted all costs exclusively to the subcontractor.]. The Court disagreed and found that the challenged clause was neither procedurally nor substantively unconscionable.

Two cases – one in Illinois, the other in Arizona [and discussed at length in the Illinois case] – figured prominently in the Court’s granting our motion to enforce the arbitration provision and compel arbitration.  Together, the cases (Kinkel v. Cingular Wireless, LLC, 223 Ill.2d 1 (2006), Maxwell v. Fidelity Financial Services, 907 P.2d 51, 58 (Ariz. 1995) provide a useful gloss on what constitutes procedural and substantive unconscionability in the context of a business-to-business contract.

How many Factors: One, Two or ‘Sliding Scale?’

Earlier case law on unconscionability found that a party had to show both procedural and unconscionability in order to void a contract term.  Other cases apply a “sliding scale” approach – where if a contract term is heavy on substantive unconscionability, it can be light on procedural unconscionability and vice versa.  Kinkel makes clear that either procedural or substantive unconscionability can defeat a given clause.  [The case is silent on whether the sliding scale test is still viable.]

Procedural Unconscionability

The procedural unconscionability question turns on whether the challenged term is so difficult to find or read that the party is essentially unaware of it.  To determine procedural unconscionability, the Court considers, among other things, the disparity in bargaining power between the drafter of the contract and the party contesting a given term, the circumstances surrounding the formation of the contract and whether a clause is “hidden in a maze of fine print.” [Kinkel at 23 citing to Frank’s Maintenance & Engineering, Inc. v. C.A. Roberts Co., 86 Ill.App.3d 980, 989-90 (1stDist. 1980)]

A court’s procedural unconscionability calculus also looks at the conspicuousness of the challenged clause, the negotiations relating to the contract, and whether the parties had an opportunity to understand the terms of the contract.

In our case, the Court found that the Subcontract’s arbitration clause was not hard to find, read or understand and appeared prominently in the contract’s text.  As a result, the Court found ruled that the arbitration clause was not procedurally infirm.

Substantive Unconscionability

Substantive unconscionability occurs where the cost of vindicating a claim is so steep that a plaintiff’s only reasonable cost-effective means of obtaining legal relief is as a member of a class action.  The Court’s substantive unconscionability analysis considers [a] the relative fairness of the obligations assumed, [b] whether terms are so one-sided “as to oppress or unfairly surprise an innocent party,” [c] whether there is “an overall imbalance in the obligations and rights imposed by the bargain, and [d] a significant cost-price disparity.” [Kinkel at 24]

When determining substantive unconscionability, Illinois courts also looks to the secrecy of a contractual arbitration term – that is,  can parties disclose the existence or result of an arbitration proceeding?  Where a party is contractually obligated to keep arbitration results private, it tips the scale towards substantive unconscionability since this ensures that the pro-arbitration litigant can deny its opponents access to precedent.

In addition, courts are more likely to find unconscionability where a consumer is involved, there is a disparity in bargaining power, and the clause is on a pre-printed form.  Moreover, where a party seeks to invalidate an arbitration provision on the ground that the arbitration would be prohibitively expensive, that party has the burden to show the likelihood of incurring those costs.

According to the Seventh Circuit, to meet her burden, the party contesting arbitration must provide some individualized evidence to show she will face prohibitive costs in the arbitration and is financially incapable of meeting those costs. [Livingston v. Associates Finance, Inc., 339 F.3d 553, 557 (7th Cir.2003)]

In our case, the Court did find that the arbitration provision in question was one-sided in our favor and against the opponent. [I disagreed; there were multiple pro-subcontractor provisions in the contract as it was exhaustively negotiated prior to its consummation.]  The Court even said that it would never advise a client to agree to it or even itself assent to it. However, the Court quickly [and rightly] noted that its subjective opinion that a contractual clause is perhaps unwise or risky was not the test for substantive unconscionability.

Instead, the crucial question was whether the provision was oppressive, unfairly surprising to the party contesting the term, portrayed an imbalance in obligations and rights or was cost-prohibitive to enforce.  The Court did not find that any of these substantive unconscionability hallmarks applied and granted our motion to compel arbitration. [The subcontractor’s Motion to Reconsider is pending.]

Still another factor leading the court to reject our adversary’s substantive unconscionability argument was the freely bargained-for nature of the arbitration clause.  This was illustrated by the Subcontract’s multiple line-outs and handwritten notes.  The presence of multiple, manual changes revealed that the parties heavily negotiated the terms of the contract.

Take-aways:

Kinkel and the cases it relies on – including Maxwell’s substantive unconscionability formulation, collectively stand for the proposition that a party claiming a contract provision is procedurally or substantively unconscionable bears the burden of establishing the existence of either or both.

Where the parties stand on an equal bargaining footing and there is no consumer nexus to the underlying contract, it is all the more difficult for the party challenging a contract term on the basis of unconscionability.

In the business-to-business setting, assuming the contract at issue isn’t hard to find or understand [and therefore not procedurally unconscionable], the best chance a litigant has of vitiating a contractual arbitration provision is to argue substantive unconscionability: that the term is so one-sided in that it portrays a stark imbalance in rights and obligations and is cost-prohibitive for the party challenging to term to enforce it.  An additional plus-factor is where the arbitration clause is subject to non-disclosure such that neither party can reveal the results of arbitration –  depriving future litigants from accessing precedent.

 

Statement Assailing Lawyer’s Appearance and Competence Not Factual Enough to Sustain Defamation Claim – Ind. Appeals Court

In Sasser v. State Farm Insurance Co., the Indiana appeals court addressed the contours of defamation law in the context of two statements that variously impugned an attorney’s physical appearance and professional abilities.

The plaintiff, an in-house lawyer for the insurance giant defendant, had a years’ long personality clash with a non-attorney claims adjuster.  The plaintiff alleged the adjuster made many disrespectful comments about the plaintiff including the two statements that drove plaintiff’s defamation suit.

The challenged statements consisted of one concerning the plaintiff’s appearance; the other, her competence as a lawyer.  The Court focused mainly on the latter claims agent’s assertion that “any competent attorney could get a defense verdict” after the plaintiff advised against taking a case to trial to company brass.  The plaintiff argued that the adjuster’s statement was per se defamation since it imputed the plaintiff’s ability to perform as a lawyer.

The trial court disagreed and entered summary judgment for the defendants.  Plaintiff appealed.

Affirming, the court first set forth the general principles of Indiana defamation law.

Defamation requires proof of a factually false statement about the plaintiff, published to a third party that tends to lower one’s reputation in the community or that deters others from associating with the person.

Defamation includes written (libel) and oral (slander) statements.  Two species of defamation law include per se defamation and per quod defamation.  The former applies to statements that are naturally harmful on their face and don’t require a plaintiff to prove special damages.

The four categories of per se defamation are statements that a plaintiff (1) committed a crime, (2) has a communicable disease, (3) is incompetent in trade or profession, and (4) exhibits a lack of integrity in performing employment duties.

Defamation per quod involves a statement that isn’t obviously defamatory but requires extrinsic evidence to establish its defamatory meaning.  To succeed on a defamation per quod claim, the plaintiff must prove actual monetary harm attributable to the challenged statement.

For a statement to be actionable as defamation, it must contain objectively verifiable facts about the plaintiff.  But where the speaker is merely expressing his/her subjective view, interpretation, or theory, the statement is not actionable.  In addition, “[j]ust because words may be insulting, vulgar or abusive words does not make them defamatory.” [22]

Here, the appeals court agreed with the trial court that the two statements under attack did not directly convey a per se defamatory statement about the plaintiff.  While allowing that individual defendant’s comment concerning the plaintiff’s appearance may be offensive, it wasn’t verifiably true or false and so didn’t rise to suable slander.

And while the adjuster defendant’s “any competent attorney” statement arguably implicated per se category (3) – by attributing an inability to perform employment duties – the court found the statement too nebulous to be verified as either true or false.  The Court viewed this statement as the claims agent’s subjective opinion that a competent attorney could secure a certain result after a hypothetical trial.

Rhetorically, the Court asked how would one demonstrate the truth or falsity of such a statement?  It then cited to a late-90s Seventh Circuit decision (Sullivan v. Conway, 157 F.3d 1092 (7th Cir. 1998)) where the Court opined that “to say [plaintiff] is a very poor lawyer is to express an opinion that is so difficult to verify or refute that it cannot feasibly be made a subject of inquiry by a jury.”

The Sullivan case relied on by the Indiana appeals court noted that the caliber of legal representation is inherently uncertain: it noted that excellent lawyers may lose most cases because they take on only challenging ones.  Conversely, according to Sullivan, poor lawyers could win all their cases by only taking easy cases. [25].

What’s more: lawyers have strengths and weaknesses: some are good at some things, while poor at others.   There simply isn’t a way to factually test an opinion concerning a lawyer’s aptitude.  Here, since there was no way to corroborate the statement’s truth or falsity, it wasn’t factual enough to support a defamation claim.

The court also rejected plaintiff’s attempt to bootstrap the “any competent attorney’ statement into a claim that the plaintiff violated Indiana Rule of Professional Conduct 1.1 which specifically speaks to lawyer competence in representation.  The Court found that since the plaintiff didn’t allege either the individual or corporate defendant didn’t say the plaintiff acted unprofessionally or improperly with respect to a specific, discrete legal matter, the plaintiff’s reliance on Indiana’s professional conduct rules fell short.

The court also rejected plaintiff’s per quod argument: that the statement’s defamatory content was established when the  court considered extrinsic evidence.  Because the statement did not impute anything false about the plaintiff that would tend to harm the plaintiff’s reputation, the statement was not defamatory per quod.

Afterwords:

This case illustrates in sharp relief the challenges a defamation plaintiff faces in a culture that vaunts freedom of expression and gives latitude for citizens to “blow off steam” in the private, employment setting.

Sasser also demonstrates that while a statement may be mean, offensive, and vulgar, it still will not rise to the level of actionable defamation if it cannot be objectively tested as true or false.

Qualitative, subjective statements about a lawyer’s abilities do not lend themselves to objective testing.  As a result, in Indiana at least, such statements generally cannot support a defamation claim.

 

 

 

 

Doctor’s Oral Promise to Retire in Future Not Enough To Sustain Healthcare Plaintiff’s Fraud Claims

In Heartland Women’s Healthcare, Ltd. v. Simonton-Smith, 2021 IL App (5th) 200135-U, the appeals court affirmed summary judgment for an obstetrician sued for fraud based on her alleged verbal promise to retire from her practice at the end of a three-year employment term.

The plaintiff claimed the defendant tricked it into buying her practice by promising to retire. The written agreement resulting from the parties’ negotiations contained neither a non-compete term nor a recital that defendant intended to retire at the agreement’s conclusion.

The trial court granted summary judgment for the defendant on plaintiff’s fraud and negligent misrepresentation claims.  Plaintiff appealed.

Affirming, the Fifth District found that the plaintiff failed to produce evidence to support its misrepresentation claims and specifically, to show defendant hatched a “scheme to defraud” the plaintiff.

In Illinois, to state a colorable fraudulent misrepresentation claim, a plaintiff must allege: (1) a false statement of material facts, (2) known or believed to be false by the person making it, (3) an intent to induce a plaintiff to act, (4) action by the plaintiff in justifiable reliance on the truth of the statement, and (5) damage to the plaintiff resulting from the reliance.

A negligent misrepresentation plaintiff must also establish these elements but instead of showing a knowingly false statement, must prove the defendant (i) was careless or negligent in ascertaining the truth of the statement and (ii) owed a duty to the plaintiff to impart accurate information.

In both a fraudulent and negligent misrepresentation claim, the statement must be of an existing or past fact and not merely a promise to do something in the future.  The alleged fraud must also be complete at the time of the challenged statement as opposed to an intention to commit a future fraud.

The ‘Scheme to Defraud’ Exception

Where the false representation of future conduct is the scheme or device employed to accomplish the fraud, a court can restore the parties to the positions they occupied before the fraud was committed.  And while courts make clear that something beyond a lone broken promise is usually required to trigger the scheme exception, that “plus-factor” is still elusive.

Some courts require a plaintiff to allege a sustained pattern of repeated false representations [see HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 131 Ill.2d 145 (1989)] while others [Roda v. Berko (401 Ill.335 (1948), Vance Pearson, Inc. v. Alexander, 86 Ill.App.3d 1105 (1980)] have held that a single promise can trigger the scheme exception.

In cases that have recognized the exception in the single broken promise setting, the plaintiff must generally produce evidence of a  defendant’s contemporaneous intention not to follow through on the promise.   The cases also make clear that whether a plaintiff is proceeding on a course of conduct scheme theory or one that involves only one promise, it must show the defendant’s fraudulent intent existed at or before the time of the promise. [25]

Here, the plaintiff could not prove the defendant promised to retire while, at the same time, never intending to fulfill that promise at the outset.  For support, the Court quoted both plaintiff’s agent’s and defendant’s deposition testimony.  Both testified that while the defendant’s future retirement was discussed prior to inking the three-year pact, it was never reduced to writing.  The plaintiff also could not pinpoint a definite promise by the defendant to retire when the employment contract lapsed.

As further proof that the defendant never unequivocally promised to retire, the plaintiff’s agent testified he even asked the defendant not to retire and that defendant stay beyondthe employment contract’s end date.  In the end, Plaintiff’s evidence did not go far enough to establish either an oral promise to retire at the agreement’s conclusion or the defendant’s intention not to fulfill that promise.

Afterwords:

In finding for the doctor defendant, the Heartland Women’s Healthcare Court was careful to respect the boundary between contract and tort law damages – a delineation that, in theory at least, prevents every broken promise from undergirding a fraud claim.

And while the content and outer reaches of the scheme to defraud exception [to the rule that a false promise is not actionable fraud] is still murky, it seems that something beyond a one-off broken promise is generally required.  A plaintiff invoking the scheme exception has a better chance of surviving a pleadings motion or summary judgment where it can show a defendant’s pattern of repeated broken promises.

Here, the plaintiff alleged only a single misstatement – defendant’s supposed oral promise to retire at the conclusion of the employment contract.  Without evidence of defendant’s contemporaneous intent not to uphold her promise, there wasn’t enough evidence of a scheme to defraud to survive summary judgment.

In hindsight, the Plaintiff should have negotiated and codified both a non-compete provision and defendant’s imminent retirement as material terms of the contract.

 

 

Lumber Exec’s Diversion of Profits to Company Owned by Son Supports Minority Shareholders’ Breach of Fiduciary Duty and Shareholder Oppression Claims – IL 2nd Dist.

Roberts v. Zimmerman, et al., 2021 IL App (2d) 191088-U provides a useful primer on the pleadings and evidence required to sustain a breach of fiduciary duty and shareholder oppression claim against a corporate officer and the contours of the business judgment rule defense to those claims.

The case involved three separate but related lumber buying companies:  Outstanding, Our Wood Loft, Inc. (“OWL”), and Lake City Hardwood (“Lake City”).  OWL is owned 1/3 by the two plaintiffs and 2/3 by the defendant majority shareholder.  Lake City is owned by the majority shareholder’s son.

Plaintiffs’ salient claim was that OWL’s majority shareholder breached his fiduciary duties to the company and minority shareholders by buying lumber from Lake City at a higher price than he could have paid other vendors.  According to the plaintiffs, the net result of the majority shareholder’s actions was a depletion in OWL profits over a multi-year span.  The fact that the director was paying the increased lumber prices to his son’s company created additional bad optics and provided more ammunition for the plaintiffs’ lawsuit.

Plaintiffs’ alleged breach of fiduciary duty and shareholder oppression under Sections 12.56(a)(3)(oppressive conduct) and 12.56(a)(4)(misapplication of corporate funds and/or waste) of the BCA.  Plaintiffs also joined an aiding-and – abetting claims against the majority shareholder’s son and wife.  Plaintiffs alleged these latter defendants were complicit in the majority shareholder’s scheme to enrich his son’s Lake City business to the detriment of OWL.

The trial court dismissed all claims except for the breach of duty claim premised on diversion of profits. After a bench trial, the trial court found in favor of the majority shareholder on this surviving claim on the basis that Plaintiffs failed to prove compensable damages.  Plaintiffs appealed.

Reversing, the appeals court first examined Illinois breach of fiduciary principles in the context of a close corporation shareholder dispute.

Breach of Fiduciary Duty

Corporate officers owe a fiduciary duty of loyalty to the corporation and are precluded from actively exploiting their positions within the corporation for their own personal benefit or impeding the corporation’s ability to conduct the business for which it was formed.

Here, the Court found the majority shareholder owed a fiduciary duty of loyalty to act in OWL’s best interest, to deal on behalf of OWL fairly and honestly, and seek to maximize OWL’s profits.  This duty included ensuring that OWL got the best price for lumber it bought from third parties.

The Court held that the majority shareholder breached his fiduciary duty by paying inflated lumber prices to his son’s company – Lake City.

The Court rejected Defendant’s business judgment rule (BJR) defense.  Under the BJR, courts will not interfere with business decisions of a corporate officer even if it seems that a more prudent decision could have been made.  However, a corporate officer cannot use the rule as a shield for conduct that does not rise to the level of due care.

Here, the court gave the BJR a cramped construction: it found that the rule only applies to honest mistakes in judgment and activities over which a corporate officer has discretion – such as whether an officer spent too much or too little on advertising, salaries, and the like.  The Rule does not apply to situations where challenged conduct subverts the rights of a corporation.  A corporate officer does not have discretion to divert profits from a corporation.

According to the Court, with minimal investigation, the majority shareholder would have discovered that Lake City was profiting at the expense of OWL by selling lumber at inflated prices to OWL.  [¶ 71]

Shareholder Oppression and Aiding-and-Abetting Claims

Reversing the Section 2-615 dismissal of the Plaintiffs’ shareholder oppression and aiding-and-abetting claims, the Court noted that shareholder oppression is not limited to acts that are illegal, fraudulent, or that involve mismanaged funds.  Instead, shareholder oppression applies to a wide gamut of conduct including a course of heavy-handed and exclusionary conduct and self-dealing.

To state a colorable aiding-and-abetting claim in Illinois, a plaintiff must allege (1) the party whom the defendant aids performed a wrongful act that caused an injury, (2) the defendant is generally aware in his or her role as part of the overall or tortious activity at the time or she provides assistance; and (3) defendant must knowingly and substantially assist the principal violation.

Here, Plaintiffs sufficiently alleged enough facts to sustain both claims. The allegations that the majority shareholder overpaid for lumber at OWL’s expense and to his son’s/Lake City’s benefit sufficiently pled an actionable oppression claim.

The Court similarly held that the Plaintiffs adequately pled Lake City’s active participation in the underlying lumber purchasing scheme in the aiding-and-abetting Complaint count.

Afterwords:

Roberts cements the proposition that a majority shareholder’s diversion of corporate profits to another entity can support both a breach of fiduciary duty claim and a statutory shareholder oppression action.

The case also makes clear that shareholder oppression is not limited to acts that are illegal, fraudulent, or that involve mismanaged funds.  Here, Plaintiffs allegation that the majority shareholder used an unnecessary middleman – Lake City – to which the company overpaid for lumber and lost resultant profits – was enough to make out a colorable oppression claim.

Finally, Roberts clarifies that a successful aiding-and-abetting a breach of fiduciary duty claim requires allegations of a defendant’s active participation and knowledge in/of  underlying wrongful conduct.  Constructive knowledge is not enough.

 

 

 

Transferee Corporation Is Judgment Debtor’s Alter Ego – Illinois Court (Deep Cut Case)

Dated but relevant for its discussion of some signature commercial litigation issues , Dougherty v. Tsai, 2017 IL App (1st) 161949, addresses, among other things, corporate alter ego liability, fraudulent transfers, and the admissibility of expert witness testimony.

In 2011, the plaintiff lessor obtained a default judgment against a corporate tenant (Tenant) in a 2009 commercial lease dispute case.

Through post-judgment discovery, the landlord learned that the Tenant and its owner (the Owner) secretly transferred money and assets from the Tenant to a related company (Transferee) that had the same employees and general line of business.  The landlord filed a new action in 2013 to hold the Transferee and Owner jointly responsible for the underlying judgment against the Tenant.

After a bench trial, the circuit court found that  the Transferee was the Tenant’s alter ego and entered judgment against the Transferee and Owner.  They appealed.

Defendants argued that the trial judge improperly entered judgment on a nonexistent cause of action – alter ego.  In Illinois, a corporation is a legal entity separate and distinct from its shareholders, directors and officers.  Corporate shareholders, officers and directors are generally not responsible for corporate debts.  But a court will disregard a corporate form and pierce its veil of limited liability where the corporation is merely an alter ego or business conduit of another person or entity.

The alter ego doctrine imputes liability to an individual or entity that uses the corporation as a vehicle to conduct the person’s or entity’s business.  However, neither piercing the corporate veil nor alter ego are separate, “stand-alone” causes of action.  Instead, they are means of imposing liability in an underlying claim.

To pierce the corporate veil, a plaintiff must demonstrate (1) unity of interest and ownership between the corporation and the person to be held liable such that separate personalities of the corporation and parties who compose it no longer exist and (2) circumstances are such that adherence to the fiction of a separate corporate existence would promote injustice or inequitable circumstances.

Here, the Court found that the trial court properly pierced the Tenant’s corporate veil of limited liability.  The similarities between the Tenant and Transferee (same business, ownership and employees, transfer of accounts from one company to the other, etc.) were so glaring that the Transferee was the Tenant’s alter ego.  Since the Tenant and Transferee were essentially one-and-the-same, the Court held that recognizing a separation between them reeked of unfairness to the plaintiff lessor.

The Court also rejected Defendants’ argument that piercing was improper since the underlying case sounded in breach of contract. In a breach of contract case, it’s more difficult to pierce the corporate veil than in tort causes of action.  This is because parties are presumed to enter into contracts voluntarily and assume the risks of the breaching party’s insolvency or protection from liability.

Here, however, the Court noted the 2013 case was not a breach of contract suit; it instead was an attempt to enforce the earlier judgment entered against the tenant.  Because the 2013 case wasn’t viewed as a breach of contract suit, the high hurdle to establish piercing in contract cases didn’t apply. [¶29]

The Court then addressed defendants’ argument that the trial court improperly allowed plaintiffs’ accounting expert to offer undisclosed damages opinions at trial.

The purpose of pretrial discovery in Illinois is to encourage timely disclosure of witnesses and opinions and discourage gamesmanship and surprise testimony.

Rule 213(g) limits expert testimony at trial to matters disclosed in answer to a Rule 213(f) interrogatory or in a discovery deposition.  An expert witness can elaborate on a disclosed opinion so long as the augmented testimony states “logical corollaries” to an opinion instead of new reasons for it.

The Court held that the trial court properly allowed the accountant’s testimony that the Tenant did not receive equivalent value in exchange for nearly $100,000 in rental payments it made to a company controlled by the Owner after the Tenant had supposedly gone out of business and decamped the leased premises.

The Court noted that the accountant had authored a pre-trial report that covered his damage opinions at trial, the report was disclosed to the Defendants and the Defendants deposed the accountant twice before trial. [¶ 43]

Afterwords

The case illustrates how important it is for judgment creditors to be tenacious in their collection efforts.  The Tenant’s Owner operated a complicated web of related business entities and freely transacted business among them.  This made it challenging for the plaintiff to unspool the various layers of corporate liability protection.  However, through its determined efforts and aggressive use of Illinois’ post-judgment enforcement rules, the plaintiff won a substantial money judgment against both individual and corporate defendants.

The case also reaffirms that alter ego and piercing the corporate veil are not  standalone causes of action but are instead a means of attaching liability on an underlying cause of action

Dougherty also makes clear that under Illinois pre-trial discovery rules, an expert witness at trial can amplify previously disclosed opinions as long as the expanded trial testimony has a factual nexus to earlier opinion.

 

 

‘Lack of Money’ Exclusion From Restaurant Lease Force Majeure Clause Not Enough to Get Eatery [Fully] Off the Hook – IL ND

Topical and timely, In re Hitz, 2020 WL 2924523 [Bankr. N.D. Ill. 2020] presents as a useful quarantine-era case that interprets the scope of a force majeure clause in a restaurant lease.

The debtor filed for bankruptcy protection in mid-March 2020 after failing to pay rent for that month.  The creditor moved to modify the automatic stay and sought post-petition rent under 11 U.S.C. 362 and 365, respectively.  In response, the restaurant debtor argued that it was excused from paying post-petition rent based on the lease’s force majeure clause [the “FM Clause”].

The FM Clause excused, the restaurant’s lease performance where its obligations were delayed or hindered by “governmental action or inaction, and “orders of government.”  Notably, the FM Clause specifically carved out an exception for lack of funds.  It stated: [l]ack of money shall not be grounds for Force Majeure.”

The debtor argued that the FM Clause was triggered by Illinois Governor Pritzker’s Executive Order 2020-7 [the “EO”] which banned Illinois restaurants from offering food and drink for on-premises consumption for the two-week period ending March 30, 2020. The EO did, however, encourage restaurants to provide off-premises consumption via delivery and curbside pick-up.

The Court first held that because rent was due March 1, 2020 – fifteen days before the debtor’s petition, the FM Clause did not excuse debtor’s March 2020 rent payment.

To decide whether the FM Clause applied to the following months [e.g. did it excuse rental payments occurring after the March 16, 2020 petition date?], the Court framed the issue as one of basic contract interpretation

In Illinois, a force majeure clause will only excuse contractual performance where the triggering event is the proximate cause of the party’s nonperformance.

The Court found the EO plainly activated the FM Clause.  The EO constituted governmental action and an “order of government” that “hindered” the debtor’s performance of its lease obligations by lopping off its on-premises food and drink revenue.

The Court rejected the creditor’s first argument that the FM Clause didn’t control because the banking and postal systems were still open.  According to the creditor, despite Covid-19, the tenant could have still written rental checks and mailed them to the landlord.  The Court deemed this argument specious; it did not address the debtor’s force majeure argument – that the inability to sell food and drink on-site made it impossible to generate enough revenue to pay rent.

Next, the creditor focused on the lease provision that a “lack of money” didn’t equate to a force majeure event.  The Court nixed this argument, too.  It found that the debtor tenant was not claiming a lack of funds as the proximate cause of its failure to pay rent.  Instead, the EO was: it shut down all Illinois restaurants’ on-premises consumption of food and beverages for a two-week period.

For textual support, the Court applied the contract interpretation maxim that a more specific provision controls over a general one.  While the lease did except a general lack of funds from the FM Clause’s reach, it also counted “governmental action” and “orders of government” as specific force majeure events.  And since the EO plainly qualified as governmental action, the Court held the tenant could properly invoke the FM Clause to reduce its post-petition rent payments.

The creditor’s argument that the tenant could have applied for an SBA loan also fell flat.  The Court noted that nothing in the lease, the FM Clause or any cited legal precedent required a defaulting tenant to try to borrow money to ameliorate any adverse governmental action that hampered a tenant’s ability to pay rent.

The Court didn’t excuse the tenant completely, though. The Court noted the EO expressly urged restaurants to offer food and beverage for off-premises via delivery and curbside pick-up.  Because of this, the Court reduced the tenant’s rental duties in proportion to its diminished ability to generate funds to pay rent.  In its response brief, the debtor estimated the EO rendered 75% of the tenant’s indoor space unusable.  But it also allowed the remaining 25% of the space, including the kitchen, was still working.

Applying this simple math, the Court found the tenant was responsible for 25% of its normal monthly rent payment [including proportionate common area maintenance expenses] for the post-petition months of April – June 2020.

Take-aways:

This case likely augurs [or is at least representative of] a future glut of Covid-19 commercial lease default cases.

Where a general provision conflicts with a more specific one, the latter will control.  Here, while the lease specifically excluded a tenant’s lack of money from the force majeure’s reach, the more specific, “order of government” and “governmental action or inaction” language controlled and served to partially excuse the tenant’s rent liabilities.

The Court’s analysis also tacitly recognized a tenant’s duty to mitigate damages.  Since the tenant acknowledged that it still had a working kitchen and 25% of usable restaurant space, the Court proportionately reduced the tenant’s lease payments instead of completely excusing them.

 

 

Federal Court Examines Illinois’ Savings Clause, Job-Related Per Se Defamation in Warring Yelp.com Posts

Shortly after their business relationship imploded, the parties in Levin v. Abramson, 2020 WL 249649, brought dueling defamation claims in Federal court premised on March 2017 Yelp posts by the parties.

The former client defendant (the “Client”) skewered the plaintiffs lawyer and her law firm (“Lawyer”) on Yelp.com in which he braded the Lawyer, among other things, an incompetent predator who defrauded Client.

The Lawyer responded with a post of her own the same day.  She added some factual context to Client’s screed and portrayed the reason behind Client’s vitriol as a simple billing dispute.  Lawyer also added in her retort that Client had a pattern of suing all of his lawyers.

Lawyer’s Complaint alleged claims for defamation and false light invasion of privacy.  Client counter-sued for defamation, too, and added legal malpractice and breach of fiduciary duty claims based on Lawyer’s Yelp response.

The Lawyer moved to dismiss Client’s counterclaims and both parties filed cross-motions for summary judgment.

Lawyer’s Motion to Dismiss

Rejecting the Lawyer’s argument that the Client’s defamation suit was untimely, the Court examined the interplay between Code Sections 13-201 [735 ILCS 5/13-201], the one-year statute of limitations for defamation suits and 13-207 [735 ILCS 5/13-207], the Illinois “savings” statute that permits otherwise time-barred counterclaims in certain circumstances.

The Court noted that each side’s alleged defamatory Yelp posts were published on March 22, 2017.  So the defamation one-year limitation period would normally expire March 22, 2018.  The Lawyer filed her defamation suit on March 8, 2018 – two weeks before the defamation statute lapsed while Client filed his counter-claim in January 2019 – almost 10 months after the limitations ran.

However, since the Lawyer’s defamation claim accrued before the defendant’s defamation counter-suit lapsed – March 22, 2018 – Section 13-207 preserved or “saved” the defendant’s countersuit even though it wasn’t filed until 10 months later.

The court then focused on whether the Client sufficiently alleged per se defamation against the Lawyer’s Rule 12(b)(6) attack.

Two salient stripes of per se defamation include statements (1) that impute a plaintiff’s inability to perform or want of integrity in the discharge of his duties of office or employment and (2) that prejudice a plaintiff or impute a lack of ability in his or her trade.  These particular per se claims must directly involve a plaintiff’s job performance;  generalized personal attacks on a plaintiff’s integrity and character are non-actionable.

The Court rejected Lawyer’s truth defense argument – that her Yelp retort was substantially true.  The Court found that whether, as Lawyer said in her post, that Client had in fact sued all of his other lawyers, lost his bid to reverse his credit card payment to Lawyer, and that his complaints to ARDC and CBA were rejected, were questions more appropriate for a summary judgment motion and not a dismissal motion.

Next, the Court addressed Lawyer’s argument that Client failed to properly allege in his Counterclaim what his job was and therefore couldn’t make out a claim that Lawyer’s Yelp response prejudiced Client in his work.  The Court held that when considering Client’s Counterclaim exhibits and supporting affidavit [both of which established that client owned a record label] Client plausibly pled Lawyer’s Yelp statements could prejudice him in his role as business owner.  On this point, the Court also credited Client’s argument that plaintiff’s Yelp response could cause the record company to lose current and future clients.

Cross-Motions for Summary Judgment

Both sides moved for summary judgment on plaintiff’s defamation and false light claims.  The Court considered Lawyer’s argument that Client’s Yelp post contained actionable facts as opposed to non-actionable opinions.

Black-letter defamation law cautions that opinions that do not misstate facts are not actionable. Whether a given statement consists of a factual (and therefore actionable) assertion, the court considers (1) whether the statement has a precise and readily understood meaning, (2) whether the statement is verifiable, and (3) whether the statement’s literary or social context signals it has factual content.

The Court found that Client’s Yelp review contained both opinion and factual elements.  The Client’s statements that Lawyer illegally charged Client’s credit card, exceeded a $4,000 ghost-writing budget by nearly $10,000, and that Client’s credit card sided with him in his dispute with Lawyer were all verifiable enough to be factual.  The Court also found that defendant’s branding plaintiff a “con artist” – normally non-actionable name-calling or opinion – rose to the level of actionable fact when viewed in context with other aspects of the Yelp review.

According to the Court, for the Lawyer to win summary judgment on her defamation claim, she must show that no reasonable jury fact could decide that Client’s Yelp statements were substantially true. Conversely, on the Client’s cross-motion, the Court noted that he must establish that a jury could only conclude that his Yelp review statements were substantially true for him to prevail on his cross-motion.

The Court found the record revealed genuine disputed fact questions as to (1) who severed the Lawyer-Client relationship and when, (2) whether the Lawyer agreed to cap her fees at $4,000 [which Lawyer disputed], (3) whether there was in fact a $4,000 budget for Lawyer’s ghost-writing work and (4) whether Lawyer had authority to charge Client’s credit card once the $4,000 retainer was exhausted.  These factual discrepancies led the Court to deny the warring summary judgment motions.

Afterwords:

Levin meticulously dissects the governing legal standards that control pleadings and dispositive motion practice in Federal courts.

The case also provides a trenchant analysis of Illinois per se defamation law, particularly the contours of job performance-related per se defamation, the truth defense, and the importance of the fact-versus-opinion analysis inherent in such a claim.

 

 

Discovery Screw-Up Not Enough To Sustain Negligence Claim – 7th Cir.

Nixing an $8M Federal jury verdict, the Seventh Circuit recently held, among other things, that a discovery rule violation cannot undergird a negligent misrepresentation claim.

The plaintiffs in Turubchuk v. Southern Illinois Asphalt Company, 958 F.3d 541 (7thCir. 2020), twice sued a joint venture consisting of two paving contractors for personal injuries sustained in a 2005 traffic accident.  The first lawsuit, sounding in negligence, settled for $1MM, the amount plaintiff believed was the maximum available insurance coverage based on the defendant’s for the JV defendant’s attorneys’ pretrial discovery disclosures.

When the plaintiffs learned that the $1MM coverage cap only applied to the joint venture entity and not to the venture’s component companies, they sued again.  This second suit alleged fraud and negligent misrepresentation – that the defendant’s counsel misrepresented its insurance coverage limits.  Plaintiffs eventually went to trial only on their negligent misrepresentation claim.

This second suit culminated in the jury’s $8MM-plus verdict.  Defendant appealed citing a slew of trial court errors.

Reversing, the Court first considered the effect of Defendant’s erroneous Rule 26 disclosure.   Under Illinois law, an actionable negligent misrepresentation claim requires proof of a legal duty on the person making the challenged statement to convey accurate information.

The Plaintiffs alleged the Defendant’s duty was found in the disclosure requirements of Rule 26 – the Federal rule governing pre-trial witness and document disclosures.  The Court found no case authority that grounded a negligence duty in a federal procedural rule.  Instead, the Court noted, cases from the 9thCircuit and 7thCircuit held just the opposite and further opined that discovery rules are “self-policing:” a discovery violation subjects the violator to sanctions under Rules 26 and 37.

The 7thCircuit also ruled that the District Court erred in finding as a matter of law (on pretrial summary judgment and in-limine orders) that defendant breached its duty to plaintiffs and that plaintiffs justifiably relied on the representations.

Whether a defendant breaches a legal duty and whether a plaintiff reasonably relies on a representation are natural fact questions. Here, on the existence of a legal duty prong, there were a plethora of unanswered questions – i.e. what information did the attorney have at his disposal when plaintiff made a $1MM policy limits (or so he thought) demand before discovery even started? – that raised possible disputed fact questions that are normally jury questions.  The District Court’s pre-trial ruling on these issues hamstrung the defendant’s efforts to challenge whether defendant’s counsel acted negligently. [15]

Another trial court error stemmed from the non-reliance clause contained in the written release that settled the Plaintiffs’ first negligence lawsuit.  A non-reliance clause will normally foreclose a future fraud suit since reliance is one of the salient fraud elements.

That said, Illinois case law is in flux as to whether a non-reliance clause precludes a later fraud action.

In addition, whether reliance is justified in a given fact setting is quintessentially a triable fact question involving what a statement recipient knew or could have learned through the exercise of ordinary prudence.  This case authority uncertainty coupled with the multiple fact issues endemic to the justifiable reliance inquiry made it improper for the District judge to make a per se, pre-trial finding that plaintiffs justifiably relied on the defendant’s counsel’s insurance coverage disclosure.

The evidence was also conflicting on whether the defendant entities even had a joint venture.  Whether or not defendants were a joint venture was integral to the amount of insurance available to settle Plaintiffs’ claims and so it impacted the causation and damages elements of plaintiffs’ negligent misrepresentation case.

A hallmark of a joint venture is joint ownership or control of a business enterprise. See http://paulporvaznik.com/joint-ventures-in-illinois-features-and-effects/6699. This created disputed fact questions that should have been decided by the jury.

Next, the Court overturned the jury’s finding that Plaintiffs’ established that Defendant’s attorney intended to induce Plaintiffs’ reliance on the amount of available insurance coverage. [The intent to induce reliance element was the only negligent misrepresentation element that went to the jury.]

Federal Rule of Evidence 602 requires a witness to testify based on personal knowledge.

However, there was no such testimony adduced at trial. Instead, the only trial evidence on this negligent misrepresentation element was  Plaintiffs’ counsel’s self-serving speculative testimony that defendant’s counsel misrepresented the available insurance coverage to induce Plaintiffs’ to accept a relatively paltry $1MM to settle the case. [21, n. 11]. Moreover, the District Court improperly excluded evidence of Plaintiff’s counsel’s credibility since he had previously surrendered his law license in lieu of disbarment for alleged acts of dishonesty, fraud or misrepresentation. See FRE 608.

In the end, the Court found there was insufficient evidence at trial for the jury to find that Defendant’s counsel intended to induce Plaintiffs’ reliance on the Rule 26 discovery disclosures of insurance coverage.

Afterwords:

A negligent misrepresentation claim cannot be premised on violation of a Federal discovery rule;

The court invades province of the jury when it rules on elements that are inherently fact-driven;

Evidence Rules 602 and 608 respectively limit a trial witness to testifying to matters of personal knowledge and allow an opponent to probe that witness’s credibility by delving into his/her reputation for truthfulness.

 

 

 

Business Expectancy Not A Transferrable ‘Asset’ Under IL Fraudulent Transfer Statute [Deconstructing Andersen Law LLC v. 3 Build Construction LLC]

Andersen Law LLC v. 3 Build Construction, LLC, 2019 IL App (1st) 181575-U, the subject of my most recent post, here , examines the nature and reach of Illinois’s Fraudulent Transfer Act, 740 ILCS 160/1 et seq. [“IFTA”] and the ‘continuation’ exception to the successor liability rule.

The Plaintiffs’ IFTA claims were based on allegations that former members of the LLC debtors’ systematically raided company bank accounts and formed a new business entity to evade a money judgment.

A colorable IFTA claim – whether it sounds in actual or constructive fraud – requires a creditor-debtor relationship.  It also requires the plaintiff to allege a transfer of an identifiable asset.

Here, the Court found the Plaintiffs failed to allege either a debtor-creditor relationship between the judgment creditor and the individual LLC members or a transfer of debtor assets.  The Plaintiffs’ failure to allege that the debtor made transfers without receiving a reasonably equivalent value in exchange for the transfer also doomed their constructive fraud complaint count.

Next, the Court jettisoned the Plaintiffs’ actual fraud claims under IFTA Section 5(a)(1).  In an actual fraud claim, the plaintiff must show a specific intent to defraud a creditor. This Section goes on to list some eleven (11) “badges” of fraud ranging from whether the transfer was concealed, to whether the transferee was a corporate insider to whether a transfer encompassed the bulk of a debtor’s assets.  740 ILCS 160/5(b)

The Plaintiffs’ allegation that the transfers were fraudulent because they occurred within a year of the judgment or went to pay members’ personal expenses were deemed too conclusory to satisfy the pleading requirements for an IFTA actual fraud claim.

The Court then rejected the Plaintiffs’ IFTA Section 6(a) [which governs claims arising before a transfer] claim based on the debtors forming a new corporation and diverting debtors’ business opportunities to that new entity.

An IFTA claim requires a transfer.  “Transfer” is defined as “every mode….of disposing of or parting with an asset or an interest in an asset…” 740 ILCS 160/2(l).

“Asset” is defined as “property of a debtor” while “property,” in turn, means anything that may be the subject of ownership.  740 ILCS 160/2(b), (j) [¶ 84]

But a transfer is not made until the debtor acquires rights in the asset transferred.

The Court held the plaintiffs did not allege an asset or a transfer under the IFTA.  Following Illinois case precedent, the Court found that unfulfilled business opportunities were not transferrable assets under the statute.  [¶¶ 84-85]

Finally, the Court rejected the Plaintiffs’ successor liability claim.  The Plaintiffs alleged the debtors’ members formed a new business entity for the purpose of avoiding the judgment.

The general rule is that a corporation that purchases the assets of another business is not liable for the debts or liabilities of the purchased corporation.  An exception to this rule applies where the purchaser is a mere continuation of the seller. [¶ 95]

To invoke the continuation exception, the plaintiff must show the purchasing corporation maintains the same or similar management and ownership as the purchased entity.

The test is whether there is a continuation of the selling business’s entity; not merely a continuation of the seller’s business.  A commonality among the seller and buyer businesses’ officers, directors, and stock are the key ingredients of a continuation. [¶ 97]

The Court found the plaintiffs’ continuation exception arguments lacking.  The plaintiffs failed to allege a purchase or transfer of the corporate debtors’ assets or stock by/to the new entity.  And while the plaintiffs did allege some common management between the corporate debtors and the new entity, the plaintiffs failed to allege a commonality of stock between the companies.

Afterwords:

A conjectural business expectancy is not tangible enough to constitute a transferable asset under IFTA;

A creditor’s attempt to impute a corporate judgment to individual shareholders is improper in a post-judgment fraudulent transfer case.  Instead, the creditor should file separate action against the individual shareholder(s) for breach of fiduciary duty, usurpation of corporate opportunities, piercing the corporate veil or similar theories;

An identify of ownership between former and successor corporation is key element to invoke continuation exception to rule of no successor liability.

 

 

 

 

Plaintiffs’ Are ‘SOL’ Based on IFTA’s SOLs

The First District recently considered when the discovery rule can mitigate the harshness of a statute of limitations [the SOL] in a fraudulent transfer case.

The plaintiffs in Andersen Law LLC v. 3 Build Construction, LLC, 2019 IL App (1st) 181575-U, a judgment creditor’s former counsel and her new law firm who secured a $200K judgment against two limited liability companies, sued under the Illinois Fraudulent Transfer Act, 740 ILCS 160/1 et seq. [the “IFTA”] alleging two members of the debtor LLCs pilfered corporate bank accounts and formed a corporation to avoid the judgment.

The judgment debtors and third party defendants moved to dismiss the IFTA claims on statute of limitation grounds and for failure to state a cause of action. The trial court granted the motion to dismiss and the plaintiff appealed.

Affirming the lower court’s dismissal, the First District noted that while an SOL motion to dismiss is normally brought under Code Section 2-619 [which involves affirmative matter], the SOL issue can be disposed of on a Code Section 2-615 [which looks at the four-corners of a pleading] motion where the complaint’s allegations make clear that claim(s) is time-barred.

An IFTA actual fraud [a/k/a fraud-in-fact] claim is subject to a four year limitations period, measured from the date of transfer. [740 ILCS 160/10(a)]. This section has a built-in discovery rule:  where the fraud could not have reasonably been discovered within the 4-year post-transfer period, the fraud-in-fact claim must be brought within one year after the transfer was or could have reasonably been discovered. [¶42]

To determine whether the discovery rule preserves a too-late claim, the court considers whether an injured party has (1) sufficient knowledge that its injury was caused by actions of another, and (2) sufficient information to ‘spark inquiry in a reasonable person’ as to whether the conduct of the party causing an injury is actionable. [¶51]

Constructive fraud [a/k/a fraud-in-law] claims, by contrast, must be brought within 4 years of the transfer.  There is no discovery rule that extends the limitations term.

Looking to the plain text of IFTA Section 10, the First District affirmed the trial court’s dismissal of the plaintiffs’ constructive fraud claims.  It held that the IFTA statute of limitations runs from the date of transfer, not, as plaintiffs argued, from the judgment. [¶48]

The Court then rejected plaintiffs’ assertion that IFTA’s discovery rule saved the otherwise time-barred actual fraud claims.  It found the plaintiffs failed to allege specific facts or a chronology as to when they reasonably learned the defendants’ diverting funds from the corporate debtors’ accounts.  As a result, the Court affirmed trial court’s dismissal of plaintiffs’ actual fraud claim.

The Court also nixed the plaintiffs’ related argument that the discovery rule applied based on the obstructionist actions of their former client [from whom the IFTA claim was assigned].  It made clear that the fraudulent concealment of a cause of action must be based on the conduct of thedefendant, not a third-party. The lone exception is where the person concealing a claim is in privity with or an agent of the defendant.  In such a case, the statute of limitations period can be tolled. [¶59]

Here, the plaintiffs failed to plead facts that the former client/underlying creditor acted in concert with the judgment debtor or the transferees.

Take-aways:

Some key take-aways from the Anderson Law LLCcase include that in a fraudulent transfer case, the four-year limitations period runs from the date of transfer, not from the date of the underlying judgment.

The case also makes clear that it is the plaintiff’s burden to successfully invoke the discovery rule to breathe life into a stale IFTA fraud-in-fact claim. [The one-year discovery extension period doesn’t apply to fraud-in-law claims.]  If a plaintiff fails to plead specific facts to carry its burden of demonstrating that its time-barred claim should be saved by the discovery rule, its claim is subject to Code Section 2-615 dismissal.

 

 

E-Mails, Phone Calls, and Web Activity Aimed at Extracting $ From IL Resident Passes Specific Jurisdiction Test – IL First Dist.

In Dixon v. GAA Classic Cars, LLC, 2019 IL App (1st) 182416, the trial court dismissed the Illinois plaintiff’s suit against a North Carolina car seller on the basis that Illinois lacked jurisdiction over the defendant.

Reversing, the First District answered some important questions concerning the nature and reach of specific jurisdiction under the Illinois long-arm statute as informed by constitutional due process factors.

Since the defendant had no physical presence or office in Illinois, the question was whether the Illinois court had specific jurisdiction [as opposed to general jurisdiction] over the defendant.

Specific jurisdiction requires a plaintiff to allege a defendant purposefully directed its activities at the forum state and that the cause of action arose out of or relates to those contacts.  Even a single act can give rise to specific jurisdiction but the lawsuit must relate specifically to that act. [¶ 12]

In the context of web-based companies, the Court noted that a site that only imparts information [as opposed to selling products or services] does not create sufficient minimum contacts necessary to establish personal jurisdiction over a foreign defendant.  Here, though, the defendant’s site contained a “call to action” that encouraged visitors like the plaintiff to pay the defendant.  [¶ 14]

The court found that plaintiff’s allegations that defendant falsely stated that the Bronco’s frame was restored, had new brakes and was frequently driven over the past 12 months [when it hadn’t] were sufficient to allege a material misstatement of fact under Illinois fraud law.  It further held that fraudulent statements in telephone calls are just as actionable as in-person statements and can give an Illinois court jurisdiction over a foreign defendant.  [¶ 17]

Viewed in the aggregate, the plaintiff’s allegations of the defendant’s Illinois contacts were enough to confer Illinois long-arm jurisdiction over the defendant.

The plaintiff alleged the defendant (i) advertised the Bronco on a national website, and (ii)  e-mailed and telephoned plaintiff several times at his Illinois residence.

Next, the court considered whetherspecific jurisdiction over the defendant was  consistent with constitutional due process considerations.

The due process prong of the personal jurisdiction inquiry focuses on the nature and quality of a foreign litigant’s acts such that it is reasonable and fair to require him to conduct his defense in Illinois.

Factors the court considers are (1) the burden on the defendant to defend in the forum state, (2) the forum’s interest in adjudicating the dispute, (3) the plaintiff’s interest in obtaining effective relief, (4) the interstate judicial system’s interest in obtaining the most efficient resolution of the case, and (5) the shared interests of the several states in advancing fundamental social policies.

Once a plaintiff shows that a defendant purposely directed its activities at the forum state, the burden shifts to the out-of-state defendant to show that litigating in the forum is unreasonable.

The Dixon court held the defendant failed to satisfy this burden and that specific jurisdiction over it was proper.

Next, the Court declined to credit defendant’s Terms & Conditions (“T&C”) – referenced in the Defendant’s on-line registration form and that fixed North Carolina as the site for any litigation.

Generally, one written instrument may incorporate another by reference such that both documents are considered as part of a single contract.  However, parties must clearly show an intent to incorporate a second document.

Here, the court found such a clear intent lacking. Defendant did not argue that it sent the T&C to Plaintiff or referenced them in its multiple e-mail and telephone communications with Plaintiff.

The court also pointed out that defendant’s registration form highlighted several of the T&C’s terms.  However, none of the featured [T&C] terms on the registration form mentioned the North Carolina venue clause.  As a result, the bidder registration form didn’t evince a clear intent to incorporate the T&C into the contract.

Afterwords:

A foreign actor’s phone, e-mail and on-line advertisements directed to Illinois residents can meet the specific jurisdiction test;

Where a Terms and Conditions document contains favorable language to a foreign defendant, it should make it plain that the T&C is a separate document and is to be incorporated into the parties’ contract by using distinctive type-face [or a similar method];

If the defendant fails to sufficiently alert the plaintiff to a separate T&C document, especially if the plaintiff is a consumer, the defendant runs the risk of a court refusing to enforce favorable (to defendant) venue or jurisdiction provisions.

 

 

Former LLC Member’s Claim for Distributions Not Tangible Enough to Undergird Conversion Claim – IL ND

The Northern District of Illinois considers a plethora of signature complex litigation issues in FW Associates, LLC v. WM Associates, LLC, 2019 WL 354953 (N.D.Ill. 2019), the culmination of a years’ long dispute between LLC members over ownership and management of Smart Bar –  a company that made an automatic cocktail dispenser [the Smartender].

After a flurry of lawsuits and an arbitration hearing that resulted in a nearly half-million dollar money judgment, the judgment creditor plaintiff brought fraudulent transfer claims against a former LLC member and his family-owned entity to whom the ex-member transferred his Smart Bar ownership interest.

The former member and his family enterprise swiftly countersued to dissolve Smart Bar, to force plaintiff to buy-out the member’s Smart Bar interest, and for conversion of the counter-plaintiff’s distributional interest in Smart Bar.

Granting the plaintiff/counter-defendant’s motion to dismiss all counts of the Counterclaim, the Court first rejected the Counter-Plaintiffs LLC Act claims under Sections 15-20 and 35-1.  It held that the individual Counter-Plaintiff lacked standing to sue under the former section as he was no longer a Smart Bar member.  The court nixed the counter-plaintiff’s Section 35-1 buy-out claim because he failed to sue the Smart Bar entity as a necessary party defendant. According to the Court, Section 35-1 does not provide an independent basis for a member to sue another member for a buyout.

In rejecting the conversion claim [premised on the claim that Plaintiffs pilfered the individual Counter-Plaintiff’s distributional interest in Smart Bar], the Court focused on the intangible nature of LLC distributions. Illinois courts do not recognize claim for conversion of intangible rights.  A conversion action to recover funds based on bare obligation to pay money is not actionable.

Citing another Federal case as precedent, the Court found that a member’s right to LLC distributions was too nebulous to anchor a conversion suit. Conversion requires theft of tangible property or property readily reduceable to cash.  Since the expectancy interest in future distributions couldn’t quickly be monetized, the Court found that the claim to future LLC distributions would not support a conversion claim.

The Court then considered Plaintiff’s res judicata and collateral estoppel defenses.

Claim preclusion, or res judicata, applies where (1) there is a final judgment on the merits rendered by a court of competent jurisdiction; (2) an identity of cause of action exists; and (3) the parties or their privies are identical in both actions.

Whether the causes of action are identical turns on whether “they arise from a single group of operative facts, regardless of whether they assert different theories of relief.”

The Court found res judicata did not bar the Counter-claim because there was no identity of causes of action between the earlier arbitration hearing and the instant case.  The Court noted that the counterclaim related to facts arising after the arbitration hearing – including the wrongful removal of two Smart Bar board members and plaintiffs’ clandestine purchase of member interests without notice to the counter-plaintiffs.  Since the predicate counterclaim allegations involved actions that post-dated the arbitration hearing, the claims were not barred by claim preclusion.

Issue preclusion, a/k/a collateral estoppel, applies where (1) the issue decided in the prior adjudication is identical with the one presented in the suit in question, (2) there was a final judgment on the merits in the prior adjudication, and (3) the party against whom estoppel is asserted was a party or in privity with a party to the prior adjudication.

Here, the court found that there was clearly a final judgment on the merits and the same parties involved.

The Court also found element (1) was satisfied.  It ruled that the arbitrator’s ruling on whether the individual defendant/counter-plaintiff breached the Smart Bar Operating Agreement was an identical issue raised in the Federal case.  This was so because three counts of the Counterclaim sought to enforce the terms of the Operating Agreement.

Since the counterclaim turned on whether the counter-plaintiff satisfactorily performed his Operating Agreement duties, and the arbitrator ruled definitively that he did not, the counterclaim counts alleging [Smart Bar] Operating Agreement infractions were barred by collateral estoppel/issue preclusion.

Afterwords:

To sue for a forced buy-out under Section 180/35-1(b) of the LLC Act, the claimant must name the LLC entity as party defendant.  The statute provides no independent basis for an aggrieved LLC member to sue another member.

A conversion suit won’t lie for a member suing to recover a judgment debtor’s LLC distribution.  Future and unknown LLC distributions are too ephemeral to support a conversion action.  If a distribution isn’t readily reduceable to cash money, the conversion claim will fail.

An arbitrator’s ruling can satisfy the final judgment on merits component of both claim preclusion [res judicata] and issue preclusion [collateral estoppel]

 

 

 

‘Half a Mil’ Conditional Judgment Too Harsh for Anemic Citation Response – IL First Dist.

Hayward v. Scorte, 2020 IL App (1st) 190476, reads like a creditors’ rights practice manual for its detailed discussion of the nature and scope of various creditor remedies under the Illinois supplementary proceedings and garnishment statutes.  (735 ILCS 5/2-1402 and 735 ILCS 5/12-701 et seq., respectively.)

The plaintiffs confirmed a half-million dollar arbitration award against a corporate defendant in a construction dispute and sought to collect. In post-judgment discovery, the post-judgment court (the Law Division’s Tax and Misc. Remedies Div.) found that the corporate debtor’s two owners failed to properly respond to citations served upon them by plaintiffs’ counsel.

The trial court entered a conditional judgment (later converted to a final one) against each corporate officer for the full amount of the underlying judgment.  The officers appealed.

Reversing, the First District first noted that supplementary proceedings in Illinois allow a judgment creditor to pursue any assets in the judgment debtor’s possession or that are being held by third parties and apply those assets to satisfy the judgment. See 735 ILCS 5/2-1402.

In the garnishment context, 735 ILCS 5/12-701 et seq., where a third party fails to respond to a garnishment summons, the creditor garnisher can request a conditional judgment against the garnishee. 735 ILCS 5/12-706.

Once the conditional judgment is entered, the creditor issues a summons to the respondent.  If the respondent still fails to answer the garnishment summons, the conditional judgment is confirmed or finalized. Once the garnishee responds to the conditional judgment summons, it isn’t bound by the earlier default and can litigate afresh. [21]

Section 12-706’s twin goals is to provide an incentive for respondents to answer a properly served garnishment summons and to protect a respondent from Draconian consequences of a single oversight. 735 ILCS 5/12-706. [21]

Code Section 2-1402 permits a court to enter any order or judgment that could be entered in a garnishment proceeding. 735 ILCS 5/2-1402(k-3).

But while Section 2-1402(k-3) incorporates the garnishment act’s full range of remedies, the section does not give a creditor broader rights than exist under garnishment law.  [23]

Conditional judgments are only allowed where a garnishee fails to appear and answer.  Here, the third-party respondents (the two corporate officers) did appear and answer the citation; the trial judge just deemed the answer incomplete.

The Court then noted that garnishment act Section 12-711(a) speaks to the precise situation here: it allows a judgment creditor to challenge the sufficiency of a garnishee’s answer and request a trial on those issues.  735 ILCS 5/12-711(a).

The garnishment statute is silent on the consequences of incomplete or insufficient answers.  Since the corporate officers did answer the underlying citations, the Court held that the trial court lacked statutory authority to enter a full money judgment against the individual defendants under Code Section 2-1402(k-3). [26]

Next, the Court examined the interplay between Section 2-1402(c)(3) and (c)(6).  The former section speaks to situations where a third party has embezzled or converted a judgment debtor’s assets.  The latter permits a  judgment creditor to sue a third party (i.e. to bring a separate cause of action) where that third party is indebted to a judgment debtor.

The Court pointed out that neither section allowed a court to assess the entire underlying judgment against a third party without a specific finding that party converted or embezzled a debtor’s assets. [27]

In fact, the lone statutory basis for a court to enter a full judgment against a third-party is where it violates the citation’s restraining provision – Section 2-1402(f)(1).

This section allows a court to punish a third party that transfers, disposes of or interferes with a judgment debtor’s non-exempt property – after a citation is served – by entering a money judgment for the lesser of (a) the unpaid amount of a judgment or (b) the value of the asset transferred. [27, 28]

The Court then stressed that a citation lien applies only to property transfers occurring after a citation is served.  Pre-citation transfers, by contrast, cannot form the basis of a money judgment against a third party.  Since the plaintiffs’ conditional judgment motion was predicated in part on property transfers occurring some two years before the citations were issued, they fell beyond the scope of sanctions considered by the trial court.

An additional ground for the First District’s reversal lay in the absence of proof that the corporate officers held any corporate assets.  Illinois law is clear that before a court can enter a judgment against a third party, there must be some record evidence that the third party possesses assets belonging to the debtor.

Since there was no statutory bases to assess the full money judgment against the two erstwhile corporate principals and since there was no evidence either principal had any corporate debtor assets in their possession, the trial court overstepped by entering a money judgment against the individual corporate officer defendants.

Take-aways:

A third party must be in possession of a debtor’s assets before a money judgment can issue against that third party;

While the garnishment act allows for a conditional judgment where a respondent fails to appear and answer a garnishment summons, and Illinois’s supplementary proceedings statute incorporates garnishment remedies, the garnishment act does not permit a conditional judgment against a garnishee who does in fact answer a garnishment summons;

A judgment creditor should file a separate veil-piercing suit against a defunct corporation’s principals if the creditor believes they are holding erstwhile corporate assets.

Collateral Attack on Order Nixing Attempt to Enforce $700K Settlement Offer Fails – IL 1st Dist.

The First District appeals court recently examined the collateral attack doctrine – which immunizes a court’s judgment from challenge in a separate judicial proceeding – in a case flowing from failed settlement talks.

The defendants in Tielke v. Auto Owners Insurance Company, 2019 IL App(1st) 181756, four years after a 2013 personal injury suit was filed, made an eve-of-trial verbal offer to settle for $700,000.

The plaintiff’s counsel verbally accepted the offer the next day before trial started.  Defendants’ counsel responded by saying “offer withdrawn.”

After plaintiff’s motion to enforce the settlement offer was denied by the personal injury case trial judge, the case proceeded to trial. Plaintiff was awarded less than half of the withdrawn $700,000 offer.  The trial judge told the plaintiff’s counsel he should file a breach of contract action at a later date.

A few weeks later, plaintiff did just that: it filed a separate breach of contract action to recover the difference between the withdrawn offer and the personal injury case judgment (about $400,000). The theory was that defendant breached an enforceable agreement to settle the personal injury suit.

The trial court dismissed the breach of contract action on defendant’s Section 2-619 motion.  The basis for the motion was that the breach of contract suit was an improper collateral attack on an order (the one denying the motion to enforce settlement) entered in the 2013 personal injury suit.

Affirming, the First District held that under the collateral attack doctrine, a court’s final judgment can only be attacked through direct appeal or a post-judgment motion to reconsider or to vacate the judgment.  735 ILCS 5/2-1203, 2-1301, 2-1401, etc.

The collateral attack rule bars later lawsuits that would effectively modify a former adjudication in another lawsuit. Both final and interlocutory (non-final) orders are immune from collateral attack. [¶31]

The appeals court found that by filing a separate breach of contract action, the plaintiff was trying to end-run the order denying her motion to enforce the settlement agreement in the 2013 personal injury suit.  Plaintiff failed to either move to reconsider the denial of her motion to enforce the settlement (which she could have done under Code Section 2-1203) or file a notice of appeal (pursuant to Rule 303).

By failing to file a motion to vacate the personal injury case court’s order denying the settlement motion or to appeal from the order, plaintiff failed to preserve the issue (whether the motion to enforce was properly denied) for review.  This precluded a later challenge to the order in subsequent litigation.

The court also rejected plaintiff’s argument premised on the personal injury case judge’s erroneous advice: that the plaintiff should proceed with the trial and later file a breach of contract action. The appeals court cited Illinois Supreme Court precedent that held “a party should not be excused from following rules intended to preserve issues for review by relying on a trial court’s erroneous belief.” [¶ 43], citing to Bonhomme v. St. James, 2012 IL 112393, 26 (2012).

Afterwords:

Tielke illustrates in sharp relief how crucial it is for litigants to properly preserve issues for review and to exhaust all avenues to challenge a trial court’s order.  Here, the plaintiff should have either moved to reconsider the personal injury judge’s denial of the motion to enforce the oral settlement agreement or directly appealed the order. In the same case.

Instead, by following the trial court’s flawed advice and filing a subsequent lawsuit, the plaintiff’s claim was barred by the collateral attack doctrine.

 

 

LLC’s Attempt to Void Foreclosure Judgment Rejected; ‘BFP’ Protected – IL First Dist.

A New Mexico LLC’s attempt to collaterally attack a mortgage foreclosure judgment five years after its entry fell flat in US Bank v. Laskowski, 2019 IL App (1st) 181627.  The case discusses the elevated level of proof required to successfully contest service of process when the property rights of a bona fide purchaser for value (a “BFP”) are at stake.

In 2009, the lender plaintiff filed a mortgage foreclosure suitagainst an individual borrower.  That borrower defaulted and in 2010 the trial court entered a foreclosure judgment.  The lender eventually sold the subject property to the BFP in 2011.

In 2016, the LLC, a non-party affiliated with the borrower that recorded an equitable interest in the property several years prior, sought to vacate the foreclosure judgment and the pertinent orders leading up to it.

The LLC moved under Code Section 2-1401(f) – the statute that allows a litigant to challenge a judgment as void for lack of jurisdiction.  The movant arguedthat since it was only served by publication – a method disallowed by the Illinois LLC Act – the trial court lacked personal jurisdiction over the LLC.

The property owner successfully moved to dismiss the LLC’s petition and the LLC appealed.

Affirming dismissal, the First District first considered whether the petitioning LLC was a necessary party to the foreclosure case.

The necessary parties to a mortgage foreclosure suit include the mortgagor and other persons (not guarantors) “who owe payment of indebtedness or the performance of other obligations secured by the mortgage and against whom personal liability is asserted.” 735 ILCS 5/15-1501(a).

Other persons, such as mortgagees or claimants, may be joined, but they don’t have to be.  A failure to include a permissive party to a foreclosure suitwill not impact a trial court’s jurisdiction.  [¶18]

Here, the operative foreclosure complaint named only the individual borrower as a defendant.  Since the LLC was neither the mortgagor nor someone against whom personal liability was asserted, the LLC was not a necessary party to the foreclosure suit. (and not the LLC).

The court further held that the LLC’s equitable interest in the property did not transform its interest into that of a mortgagor (who would have been a necessary party).  The Court defined a beneficial interest as an expectancy interest only: it does not rise to the level of legal title. [¶ 20]

Next the Court considered whether the BFP property’s current owner was immunized from the LLC’s attempt to vacate the judgment.

Section 2-1401(e) protects BFPs from void judgments affecting real estate title.  A BFP is protected so long as the defect in service is not apparent from the face of the record and the BFP was not a party to the original action. Where there is no defect on the face of the record, the BFP is insulated from a challenge to an otherwise faulty judgment. [¶ 25]

Here, the record reflected the LLC was properly served.  While the LLC claimed the wrong entity was served (a similarly named Illinois business was served according to the return of service on file), a third party would not have known this (i.e, it would not have been readily apparent) from the four corners of the record.

Instead, discovering the service infirmity would have required a BFP to go “beyond the face of the record”: it would have to cross-reference New Mexico’s Secretary of State records with Illinois’s to learn that the wrong entity was served.

Since it would have been such a time-consuming and laborious task to unmask whether the proper LLC was served, the Court protected the BFP and denied the LLC’s petition.

Afterwords:

This case reiterates that only a mortgagor and non-guarantors subject to personal liability under a mortgage are necessary parties to a foreclosure suit.  Laskowski also reaffirms that a BFP is a favorite of the law.  For while a void judgment can be attacked at any time, courts will side with a BFP who could be harmed by a nullified foreclosure judgment.

 

Don’t Confuse Joint Tenancy with Tenancy-By-Entirety Ownership – Indiana Court Cautions

Title to real estate is typically held in one of three ways: tenancy in common, joint tenancy and tenancy by the entirety.

The salient characteristic of tenancy in common is that each owner holds a ½ interest in the property and that upon an owner’s death, his/her share passes to his/her heir.

Joint tenancy’s hallmark is its survivorship feature: when a joint tenant dies, his/her share passes to the surviving joint tenant. The deceased’s interest will not pass to an heir.

With tenancy by entirety (“TBE”) ownership, sometimes described as “joint tenancy with marriage,” the property is immune from one spouse’s creditor’s judgment lien. This means the creditor of one spouse cannot foreclose on the TBE property. However, to qualify for TBE protection, the parties must be married and live in the property as a primary residence. If the property owners are married but do not use the home as the marital homestead, TBE won’t shield the property from creditor collection efforts.

In Flatrock River Lodge v. Stout, 130 N.E.2d 96 (Ind. Ct. App. 2019), an Indiana appeals court delved into the joint tenancy vs. TBE dichotomy and how the difference between the two realty title vehicles dramatically impacts a judgment lien’s enforceability.  The trial court denied the creditor’s motion to foreclose a judgment lien because the subject real estate was held in joint tenancy. On appeal, the Court considered whether a judgment creditor could foreclose on joint tenancy property, force its sale, and apply the proceeds against the judgment.

The judgment debtor owned real estate in joint tenancy with his daughter. The debtor died during pendency of the lawsuit and by operation of law, the title to the property vested in the daughter. Before the debtor died, however, the plaintiff/creditor recorded its judgment lien against the property.

The creditor moved to foreclose its judgment lien against the property. The debtor’s daughter argued the property was exempt from execution by Indiana’s tenancy-by-entirety statute (the TBE statute). Indiana Code Section 34-55-10-2(c)(5).  The trial court agreed with debtor’s daughter and denied the creditor’s motion.

Reversing, the Indiana appeals court first rejected the defendants’ argument that since the debtor died, the property escaped plaintiff’s lien. The court noted that the plaintiff’s judgment lien attached from the moment it recorded its judgment against the property – some two years before debtor’s death. As a result, the debtor’s daughter took the property subject to the plaintiff’s lien.

Next, the appeals court rejected the trial court’s finding that the property was immune from the plaintiff’s judgment lien.

In a joint tenancy, each tenant acquires an equal right to share in the enjoyment of the land during their lives. A joint tenant is severed where one joint tenant conveys his/her interest to another and destroys the right to survivorship in the other joint tenant(s). Once a joint tenancy conveys his/her share to another, he/she becomes a tenant in common with the other co-tenant.

Each joint tenant can sell or mortgage his/her interest in property to a third party and most importantly (for this case at least), each joint tenant is subject to a judgment creditor’s execution. [8]

TBE ownership only exists between spouses and is grounded in legal fiction that husband and wife a single unit. A TBE cannot be severed by the unilateral action of one tenant. An attempted transfer of a TBE ownership interest by only one spouse is a legal nullity. The key difference between joint tenancy and TBE is that with the latter, a creditor of only one spouse cannot execute on the jointly owned property

The Court noted that under Indiana Code 34-55-10-2(c)(5), property held in TBE is exempt from execution of a judgment lien. However, this statute applies uniquely to TBE ownership; not to joint tenancy. According to the court, “[h]ad the Indiana legislature intended to exempt from execution real estate owned as joint tenants, it would have done so.” [14]

Take-away:

This case shows in stark relief the perils of conflating joint tenancy and tenants-by-entirety ownership. If a property deed does not specifically state tenancy by the entirety, the property will not be exempt from attachment by only one spouse’s creditor.

Hotel Registration Data Considered Computer-Stored and Computer-Generated Business Records – IL Appeals Court

Super 8 and Motel 6 registration records take center stage in an Illinois appeals court’s discussion of the razor-thin difference between computer-stored and computer-generated business records.

In People v. Schwab, 2019 IL App (4th), a sexual assault defendant argued the trial court erroneously admitted his hotel check-in records during a jury trial that culminated in a guilty verdict and long prison sentence.

The prosecution offered hotel records into evidence at trial to place the defendant at a certain location and at a fixed date and time. Over the defendant’s hearsay objection, the trial court allowed the records into evidence. Defendant appealed his conviction and 25-year sentence.

Affirming, the appeals court first provided a useful gloss on hearsay rules generally and then drilled down to the specific rules governing business records.

Hearsay is an out of court statement offered to prove the truth of the matter asserted and is typically excluded for its inherent lack of reliability.  The business-records exception allows for the admission of a writing or record where (1) the writing or record was made as a memorandum or record of the event, (2) it was made in the regular course of business, and (3) it was the regular course of business to make the record at the time of the transaction or within a reasonable time thereafter.

Anyone familiar with a business can testify as to business records, and the original entrant (i.e. the person inputting the data) doesn’t have to be a witness for the records to get into evidence. [⁋ 37]

Additional foundation is required when a business record is contained on a computer.  Illinois courts recognize the distinction between (a) computer-stored records and (b) computer-generated records.

The foundation for admitting computer-generated records is less stringent than that governing computer-stored ones. Computer-generated records are deemed intrinsically more reliable than their computer-stored counterparts.

Print-outs of computer-stored records are admissible as a hearsay exception where (1) the computer equipment is recognized as standard, (2) the input is entered in the regular course of business reasonably close in time to the happening of the event recorded, and (3) the foundation testimony establishes that the source of information, method and time of preparation indicate its trustworthiness and justifies its admission. [⁋ 38]

For computer-generated records, the admissibility threshold is more relaxed: the proponent only needs to show the recording device was accurate and operating properly when the data was generated.

The Court found that the Super 8 reservation records were computer-generated (and therefore subject to less stringent admissibility rules). The hotel’s front desk clerk’s trial testimony established that the hotel’s reservation record was automatically generated by a hotel computer at the time someone books a reservation.

According to the Court, that data may have originally been input into a third-party website (like Priceline or Expedia) didn’t cast doubt on the records’ reliability.  All that mattered was that the registration record was created automatically and contemporaneously (with the on-line reservation) to qualify as computer-generated records.

The Court agreed with the defendant that two Motel 6 records offered as prosecution trial exhibits were computer-stored. The court found that the computer records created when a guest checked in required the hotel clerk to scan the guest’s identification card and to manually input the guest’s check-in and check-out times and payment information. Since this information was the end result of human data entry, the records were deemed computer-stored.

Even so, the Court found that the State sufficiently laid the foundation for the computer-stored data. The Court credited the Motel 6 hotel clerk’s testimony that the franchise’s check-in procedures were uniform and the hotel’s computer booking system was standard in the hospitality industry.  Taken together, the testimony concerning Motel 6’s integrated check-in processes and its use of industry-standard reservation software was enough to meet the computer-stored evidence admissibility threshold.

Afterwords: Despite Schwab’s disturbing fact-pattern, the case has value for civil and criminal trial practitioners alike for its trenchant discussion of business records exception to the hearsay rule and the admissibility standards for computer-generated and computer-stored records.

Utah Default Judgment Not Subject to Full Faith and Credit in IL: No Long-Arm Jurisdiction Over Illinois Defendant Equals Void Judgment

Snap Advances, LLC v. Macomb Office Supply, Inc., 2019 IL App(1st) 180773-U examines the enforceability of a Utah judgment against an Illinois-based college bookstore operator.

There, a Utah business lender sued a defunct bookstore, its owner and corporate successor in Utah state court for breach of contract. The underlying contract (signed by the plaintiff and dissolved corporate predecessor) had Utah choice-of-law and venue terms. No defendant appeared in the Utah case and the plaintiff won a default judgment.

After the plaintiff registered the Utah default judgment in Illinois, the Illinois  court granted the successor company’s motion to vacate the Utah default judgment and dismissed the post-judgment proceedings. The plaintiff appealed.

Affirming, the appeals court first held that under the full faith and credit clause of the U.S. Constitution, every court must validate a foreign court’s judicial proceedings. The Uniform Enforcement of Judgments Act, 735 ILCS 5/12-650 et seq. also prevents an enforcing court from considering the merits of a foreign judgment.

But two instances where an enforcing court will look into the merits of a foreign judgment are where (1) the rendering court lacked jurisdiction over the defendant/judgment debtor, or (2) there is fraud in the procurement of the judgment.

This is so because a foreign judgment is not entitled to full faith and credit where an underlying defect (such as lack of jurisdiction) voids the judgment.  However, where the rendering court (here, Utah) specifically finds that it does have jurisdiction over a defendant, its ruling is conclusive and cannot be challenged by the enforcing court (Illinois).

But where the rendering court does not specifically rule on the jurisdiction question, the enforcing court can examine the rendering court’s jurisdiction. [⁋⁋ 22-23]

Since the Utah judgment was silent as to whether the Illinois-based successor company was subject to Utah jurisdiction, the Illinois court could look into whether the Utah court had jurisdiction over the successor defendant.  To do this, the Illinois court looked to Utah’s long-arm jurisdiction and Federal due process principles.

A Utah court has long-arm jurisdiction over a foreign defendant where a defendant does business in Utah, contracts to supply goods or services there, causes injury in Utah or owns Utah real estate. Utah Code Ann. s. 78B-3-205 (West 2016). Federal due process requires an out-of-state defendant to have minimum contacts with a foreign jurisdiction such that it should reasonably anticipate being sued there.

Since the record was silent as to any acts the Illinois successor did in Utah that could support either long-arm jurisdiction or Federal due process concerns, there was no basis for Utah jurisdiction over the Illinois successor entity.

The court rejected the plaintiff’s argument that the successor consented to Utah jurisdiction based on the predecessor’s assent to Utah law and venue provisions. Since the successor was not a party to the contract, there was nothing tying it to the contractual Utah choice-of-law and venue terms.

The court also nixed the plaintiff’s claim that since the Illinois defendants were served in Utah, they were subject to Utah jurisdiction. But, as the court astutely remarked, “service does not confer jurisdiction.”

Even if the Illinois defendant was property served in Utah, the Court continued, a defendant did not have to appear in Utah or respond to the Utah lawsuit. Instead, it could wait until the Utah judgment was registered in Illinois and then seek to vacate the Utah judgment.

But the defendant’s conduct didn’t go unnoticed by one of the appellate judges.  In a special concurrence, Judge Pucinski decried the business owner’s “slick” grifter-like financial “shell trick” where the owner plainly engineered the transfer of the defunct book store’s assets to a new buyer – the Illinois successor –  that operated from the same location, with the same inventory and identical personnel as the prior company.

Judge Pucinski worried about the possible chilling effect the majority’s ruling could have on out-of-state companies doing business with Illinois companies: a foreign company could be dissuaded from commerce with Illinois entities if Illinois courts would not hold their companies accountable for successor liability.

In the end though, the concurring judge sided with the majority. She cited a lack of record evidence that the Illinois successor was subject to Utah jurisdiction and a lack of Utah case law that stood for proposition that a corporate successor was bound by a predecessor’s contractual consent to jurisdiction in a sales contract. [⁋ 51]

Afterwords:

The case illustrates the limits of the Full Faith and Credit in the context of interstate jurisdictional disputes.

Snap Advances also demonstrates that where there is no evidence of a corporate successor’s consent to foreign state jurisdiction, a default judgment entered there could have no effect here.

The case also cements proposition that contractual choice-of-law and venue terms consented to by a corporate predecessor won’t bind its successor.

IL ND Considers Conflicts of Laws and Inevitable Disclosure Doctrine in Employee Non-Solicitation and Trade Secrets Spat

When some  high-level General Electric employees defected to a Chicago rival, GE sued for trade secrets theft and for violations of employee non-solicitation and confidentiality agreements.

Partially granting and partially denying the employee defendants’ motions, the District Court in General Electric Company v. Uptake Technologies, Inc., 2019 WL 2601351 (N.D.Ill. 2019) provides a thorough choice-of-law analysis and discusses the trade secrets case inevitable disclosure doctrine.

Non-Solicitation Agreement: What State’s Law Applies – New York or California?

The first choice-of-law question involved GE’s non-solicitation agreement (the NSA). GE argued that New York law applied since that was what the NSA specified. For their part, the defendants argued that California law controlled the NSA since that is where they were based when they worked for GE and because California law voids employment restrictive covenants.

In Illinois (a federal court exercising supplemental jurisdiction over state-law claims applies the choice-of-law rules of the forum state – here, Illinois), a choice-of-law provision governs unless (1) the chosen forum has no substantial relationship to the parties or the transaction, or (2) application of the chosen law is contrary to a fundamental public policy of a state with a materially greater interest in the issue in dispute.

A party challenging a contractual choice-of-law provision bears the burden of demonstrating a difference in two states’ laws – a conflict – and that the conflict will make a different in the outcome of the lawsuit.

Under New York law, a restrictive covenant in an employment agreement is reasonable if it is no greater than required to protect a legitimate interest of an employer, does not impose an undue hardship on the employee and is not injurious to the public. New York court also consider the temporal and geographic reach of restrictions.

The court found that the NSA’s were enforceable under New York law. It noted that GE was a global company, the one-year term was reasonable and the restriction was narrowly-tailored to high-level employees.

By contrast, California Code Section 16600 voids any contract “by which anyone is restrained from engaging in a lawful profession, trade or business of any kind.” The Court found the NSA was likely void under California law, but it wasn’t a cut-and-dried issue since there is a clear split in California case authorities: some courts enforce non-solicitation agreements; others don’t.

This schism in the California courts signaled an unclear California policy which led the Court to ultimately conclude that applying New York law did not clearly impinge on a fundamental California public policy. [*6]

The Court then found that GE sufficiently alleged the required elements of a breach of contract claim against the defendants and denied the defendants’ motion. (The court did grant the motion filed by the lone employee whose NSA specified California law would govern.)

GE’s Trade Secrets Claim – What Law Governs?

Illinois’s choice-of-law rule for trade secret misappropriation focuses on where the misappropriation occurred or where the defendant benefitted from the misappropriation.

Since Uptake’s (the individual defendants’ corporate employer) principal place of business is in Illinois and the defendants allegedly pilfered GE’s trade secrets there, Illinois law governed GE’s trade secrets claim.

Illinois recognizes the “inevitable disclosure doctrine” which allows a trade secrets plaintiff to show misappropriation by showing a defendant’s new employment “will inevitably lead him to rely on the plaintiff’s trade secrets.”

The plaintiff must allege more than that an erstwhile employee’s general skills and knowledge will be used to benefit a new employer. Instead, the plaintiff must focus on protecting “particularized plans or processes” a defendant was privy to which are unknown to industry competitors and could give the new employer an unfair advantage over the plaintiff. [*9][citing to PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

In evaluating whether disclosure is inevitable, the Court considers (1) the level of competition between former and current employer, (2) whether employee’s new position is similar to former position, and (3) actions new employer has taken to protect against the new employee’s use or disclosure of former employer’s trade secrets.

Since GE alleged that Uptake is a competitor in the data analytics market for industrial machinery and the defendants’ Uptake positions are similar to their former GE ones, the Court found GE sufficiently pled an ITSA claim under the inevitable disclosure doctrine.

Afterwords:

This case illustrates in sharp relief how convoluted and important choice-of-law questions are when different employment agreement sections apply different states’ laws.

The case also provides a useful summary of the key considerations litigators should hone in on when alleging (or defending) trade secrets misappropriation claims based on the inevitable disclosure doctrine.

Subcontractor’s Failure to Get Certified Mail ‘Green Cards’ into Evidence = Draconian Trial Loss in Lien Spat

The Second District appeals court recently affirmed a harsh result against a subcontractor who failed to properly serve a Section 24 notice in accordance with the strictures of the Illinois Mechanics Lien Act.

The earth-moving subcontractor recorded a lien against a nascent Starbucks in Chicago’s western suburbs seeking payment for various change orders. It sent its lien notice to the property’s lender by certified mail but not to the property owner.

After a bench trial, the trial judge reluctantly found for the property owner defendants and held that the subcontractor’s lien notice failed to follow the Act.  The subcontractor appealed.

Affirming judgment for the property owner, the Court first emphasized the oft-cited rule that since rights created by the Act are statutory, the statutory technical and procedural requirements are strictly construed. The burden of proving that each requirement of the Act has been satisfied is on the party seeking to enforce its lien – here, the subcontractor.  But where there is no dispute that an owner actually received notice, courts will overlook technical defects.

Section 24 of the Act requires a subcontractor to serve notice of its intent to lien by certified mail or personal delivery to the record owner and lender (if known)within 90 days after completing the work on the property. 770 ILCS 60/24(a).

An exception to this notice requirement is where a general contractor’s sworn statement provides the owner notice of the subcontractor’s work and unpaid amount.

While courts will uphold a lien notice sent only to an owner (and not to the lender) since there is no concern of the owner being prejudiced or having to pay twice, the reverse isn’t true. Citing to half-century-old case law, the Court held that since notice to an owner is the ‘very substance of the basis on which a mechanic’s lien may be predicated,’, the Court refused to excuse the subcontractor’s failure to serve the owner with its lien notice even though the lender was given proper statutory notice.

And while the plaintiff attached some certified mail green (return) card copies to its written response to Defendant’s directed verdict motion at trial, the plaintiff never authenticated the cards or offered them in evidence at trial. As a result, the appeals court refused to consider the green cards as part of the appellate record. (An appeals court cannot consider documents that were not admitted into evidence at trial.)

In addition, the plaintiff’s trial testimony was conflicting. The Plaintiff’s owner’s testimony conflicted with a 2014 affidavit of mailing prepared by one of Plaintiff’s employees.  This evidentiary dissonance failed to show the owner’s actual notice of the plaintiff’s lien notice.  As a result, the trial court found that the plaintiff failed to carry its burden of proving that it complied with its Act lien notice rules.

The court then rejected the subcontractor’s argument that the owner had actual notice of its work since it saw the plaintiff performing grading work on the property and the plaintiff sent regular invoices to the owner’s agent.  However, under Illinois law, the mere presence of or owner’s knowledge that a contractor on a job is not a valid substitute for the required statutory notice.

The court also nixed the subcontractor’s claim that the owner had actual notice of the subcontractor’s work based on the sworn statements submitted to the owner from the general contractor. While courts have upheld an otherwise deficient subcontractor lien notice where sworn statements in the record plainly show the subcontractor’s identity and amounts owed.  Here, there were no sworn statements in the record. A trial witness may only testify to matters on which he/she has personal knowledge. Ill. R. Evid. 602. Since the plaintiff didn’t call to testify the owner’s construction manager – the only one who supposedly received the GC’s sworn statements (that identified plaintiff) –  there was no competent evidence that the owner received and reviewed any sworn statements that referenced the plaintiff’s work and amounts owed.

Afterwords:

This case shows how unforgiving statutory notice requirements can be in the mechanics lien context.

In hindsight, the subcontractor plaintiff should have introduced certified mail receipts into evidence.

Failing that, it should have called the owner’s construction manager as an adverse agent to lock in testimony that the general contractor furnished the owner with sworn statements and those statements sufficiently identified the subcontractor plaintiff.

Cal. Court Validates Reverse-Piercing; Creditor Can Add LLC to Prior Judgment Against Member

I previously featured (here) a 2018 4th Circuit decision that discussed reverse veil-piercing under Delaware law.  In 2017, a California court provided its own trenchant analysis of reverse veil-piercing and how that remedy relates to a charging order against an LLC member’s distributional interest.

The judgment creditor plaintiff in Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214 (2017) won a $7.2M judgment against a prominent real estate developer. In post-judgment discovery, the creditor learned the developer was sheltering his assets in an LLC; an entity through which he also loaned over $40M to family members and partnerships in the years leading up to the judgment.

The trial court denied the creditor’s motion to “reverse pierce” and hold the LLC responsible for the judgment.  The court reasoned that reverse-piercing was not a recognized remedy in California. The creditor appealed.

First, the court noted, under California law, a judgment creditor can move to modify a judgment to add additional judgment debtors. See Cal. CCP 187.

The court then stressed that an LLC’s legal separation from its members may be disregarded where the LLC is utilized to “perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose.”

In such circumstances, the acts of the LLC will be imputed to the individual members or managers who dominate the LLC. Under this alter-ego doctrine, individuals or other entities cannot abuse the corporate form to commit a fraud or elude creditors.

The appeals court broke with the trial judge and held that California recognizes “outside reverse veil piercing.” This applies where a third-party creditor tries to satisfy an individual’s debt by attaching assets of an entity controlled by that individual.

The reasons typically given by courts that decline to reverse pierce are discouraging creditor’s from bypassing standard judgment collection protocols, the protection of innocent shareholders and preventing the use of equitable remedies where legal theories or remedies are available.

Here, however, those policy concerns weren’t present.

First, the court noted that unlike in the corporate debtor context – where a creditor can step into a shareholder’s shoes and obtain shares, the right to vote and to dividends – a creditor’s rights against an LLC member are limited.

With an LLC, a plaintiff can only get a charging order against the LLC member’s distributional interest. The member remains an LLC member and keeps all of his/her rights to manage and control the LLC.

And since the individual defendant in Curci retained complete control to decide if and when LLC distributions would be made, the charging order was an illusory remedy.

This last point was blinding in light of the evidence that the defendant caused the LLC to distribute nearly $180M in the six years leading up to the judgment and no distributions had been made in the five years after the judgment.

The Court further distinguished the charging order remedy from reverse piercing in that the former only affixes to an LLC member’s distributional interest while the latter remedy reaches the LLC’s assets; not the individual member’s. [7]

Second, there was no possibility that an innocent shareholder would be harmed. This was because the judgment debtor owned a 99% interest in the LLC. (The 1% holder was the debtor’s wife who, under California community property laws, was also liable for the debt owed to the plaintiff.)

Lastly, there was no concern of the plaintiff using reverse-piercing to circumvent legal remedies like conversion or a fraudulent transfer suit. The court found that burdening the creditor with showing the absence of a legal remedy would sufficiently protect against indiscriminate reverse piercing.

Afterwords:

While Curci presents an extreme example of an individual using the corporate form to elude a money judgment, the case illustrates the clear proposition that if an individual judgment debtor is using a business entity to shield him/herself from a judgment, the court will reverse pierce and hold the sheltering business jointly responsible with the individual for a money judgment.

The case should be required reading for any creditor’s rights practitioners; especially on the West Coast.

Court Weighs In On Constructive Fraud in Contractor Lien Dispute, Summary Judgment Burdens – IL First Dist.

The First District affirmed partial summary judgment for a restaurant tenant in a contractor’s mechanics lien claim in MEP Construction, LLC v. Truco MP, LLC, 2019 IL App (1st) 180539.

The contractor sued to foreclose its $250,000-plus mechanics lien for unpaid construction management services furnished under a written contract between the contractor and restaurant lessee.

The lessee moved for summary judgment arguing the contractor completed only about $120,000 worth of work and so the lien was doubly inflated.  The lessee further contended that the majority of the liened work was done by plaintiff’s sub-contractors; not the plaintiff. The trial court sided with the lessee and found the plaintiff’s lien constructively fraudulent.

Affirming, the appeals court first restated the familiar, governing summary judgment standards and the contours of constructive fraud in the mechanics’ lien context.

The “put up or shut up” litigation moment – summary judgment requires the opposing party to come forward with evidence that supports its skeletal pleadings allegations.

Statements in an affidavit opposing summary judgment based on information and belief or that are unsupported conclusions, opinions or speculation are insufficient to raise a genuine issue of material fact.

Section 7 of the Illinois mechanics lien act (770 ILCS 60/7) provides that no lien shall be defeated due to an error or overcharging unless the overcharge (or error) is “made with intent to defraud.” Section 7 aims to protect the honest lien claimant who makes a mistake rather than the dishonest claimant who makes a knowingly false statement. Benign mistakes are OK; purposeful lien inflation is not.
An intent to defraud can be inferred from “documents containing overstated lien amounts combined with additional evidence.” The additional evidence or “plus factor” requires more than a bare overcharge on a document: there must be additional evidence at play before a court invalidates a lien as constructively fraudulent.

Affirming the trial court’s constructive fraud ruling, the First District pointed to plaintiff’s president’s sworn statement which indicated plaintiff only performed a fraction of the liened work and that the majority of the lien was from subcontractors who dealt directly with the lessee. Critical to the court’s conclusion was that the plaintiff did not have contractual relationships with its supposed sub-contractors.

Looking to Illinois lien law case precedent, the Court noted that lien overstatements of 38%, 82% and 79% – all substantially less than the more than 100% overstatement here – were all deemed constructively fraudulent by other courts. [⁋ 17]

The Court also affirmed the lower court’s denial of the contractor’s motion for more discovery. (The contractor argued summary judgment was premature absent additional discovery.) Illinois Supreme Court Rule 191(b) allows a party opposing summary judgment to file an affidavit stating that material facts are known only to persons whose affidavits can’t be obtained due to hostility or otherwise. The failure to file a 191(b) motion precludes that party from trying to reverse a summary judgment after-the-fact on the basis of denied discovery. [⁋ 20]

Here, the contractor’s failure to seek additional time to take discovery before responding to the lessee’s summary judgment motion doomed its argument that the court entered judgment for the lessee too soon.

Take-aways:

Constructive fraud requires more than a simple math error. Instead, there must be a substantial overcharge coupled with other evidence. Here, that consisted of the fact the contractor neither performed much of the underlying services nor had contractual relationships with the various subcontractors supposedly working under it.

The case also solidifies the proposition that while there is no magic lien inflation percentage that is per se fraudulent, an overstatement of more than 100% meets the threshold.

Procedurally, the case lesson is for a summary judgment respondent to timely move for more discovery under Rule 191(b) and to specifically identify the material evidence the summary judgment respondent needs to unearth in the requested discovery.

Contingent, ‘PI’ Firm’s Dearth of Time Records Dooms Attorneys’ Fee Award in Real Estate Spat

A personal injury firm’s (Goldberg, Weisman and Cairo) failure to properly document its attorney time records resulted in an almost 88% fee reduction after the defendants appealed from a real estate dispute bench trial verdict.

The plaintiffs – one of whom is a GWC attorney – in Kroot v. Chan, 2019 IL App (1st) 181392 sued the former property owners for violating Illinois Residential Real Property Disclosure Act, 765 ILCS 77/1 et. seq. (the Act) after they failed to disclose known property defects to the plaintiffs.

The trial court found for the plaintiffs on their Act claims and common law fraud claims and assessed nearly $70,000 in attorneys’ fees and costs against defendants. The defendants appealed citing the plaintiffs’ dearth of competent fee support.

Reversing, the First District emphasized how crucial it is for even a “contingent fee law firm” like GWC to sedulously document its attorney time and services.

Under Illinois law, a plaintiff seeking an attorney fee award had the burden of proving entitlement to fees. Additionally, an attorneys’ fee award must be based on facts admissible in evidence and cannot rest on speculation, conjecture or guess-work as to time spent on a given task.

Unless there is a contractual fee-shifting provision or a statute that provides for fees, an unsuccessful litigant is not responsible for the winner’s fees. And while the Act does provide a “hook” for attorneys’ fees, the common law fraud claim did not. As a result, the First District held that the fraud verdict against one defendant wasn’t properly subject to a fee petition.

“Reasonable attorneys’ fees” in the context of a fee-shifting statute (like the Act) denotes fees utilizing the prevailing market rate. The Act’s fee language differs from other statutes in that it provides that fees can be awarded to a winning party only where fees are incurred by that party. “Incurred,” in turn, means “to render liable or subject to” [⁋⁋ 11-12 citing Webster’s Third New International Dictionary 1146 (1981)]. As a consequence, unless attorneys’ fees have actually been incurred by a prevailing party, the trial court has no authority to award fees under the Act.

At the evidentiary hearing on plaintiff’s fee petition, three GWC attorneys admitted they didn’t enter contemporaneous timesheets during the litigation and that a document purportedly summarizing GWC’s attorney time was only an estimate. The lawyers also conceded that plaintiffs didn’t actually pay any legal fees to GWC. Still another attorney witness acknowledged she tried to reconstruct her time nearly 8 months after the underlying work was performed. [⁋ 19]

The appeals court noted the record was devoid of any evidence that (1) plaintiffs ever agreed to pay for legal services, (2) plaintiffs were ever billed for GWC’s legal services, (3) plaintiff ever paid for those services, or (4) that GWC expected plaintiffs’ to pay for its services. The court also found that the supporting affidavits submitted in support of the fee petition were inadmissible hearsay documents. (It’s not clear from my reading of the opinion why the affidavits and billing record did not get into evidence under the business records hearsay exception.)

In the end, the Court found the absence of either simultaneous time records or testimony that the attorney working on the matter had an independent recollection of the time and tasks incurred/performed rendered the fee petition too speculative.

Kroot provides a useful gloss on the governing standards that control when a plaintiff can recover attorneys’ fees. Aside from stressing the importance of making contemporaneous time records and offering proper supporting fee evidence, the case’s lesson is that in the context of a statute like the Act that only provides for fees actually incurred, the plaintiff must actually pay attorneys’ fees to merit a fee award. Since the evidence was that the prevailing plaintiffs never actually were billed or paid any fees to their attorneys, the plaintiffs’ lawyers failed to carry their burden of proof on the fees issue.

Actuarial Firm Owes No Independent Legal Duty to Health Plan; Lost Profits Claim Lopped Off – 2nd Cir.

The Second Circuit appeals court recently examined the contours of New York’s economic loss rule in a dispute involving faulty actuarial services.

The plaintiff health care plan provider in MVP Health Plan, Inc. v. Optuminsight, Inc., 2019 WL 1504346 (2nd Cir. 2019) sued an actuary contractor for breach of contract and negligence when the actuary fell short of professional practice standards resulting in the health plan losing Medicare revenue.

The plaintiff appealed the district court’s bench trial verdict that limited plaintiff’s damages to the amounts it paid the actuary in 2013 (the year of the breach) and denied the plaintiff’s request for lost revenue.

The plaintiff also appealed the district court’s dismissal of its negligence count on the basis that it was duplicative of the breach of contract claim and the actuary owed the plaintiff no legal duty outside the scope of the contract.

Affirming, the Second Circuit first addressed the dismissal of plaintiff’s negligence claim. In New York, a breach of contract claim is not an independent tort (like negligence) unless the breaching party owes a legal duty to the non-breaching party independent of the contract. However, merely alleging a defendant’s breach of duty of care isn’t enough to bootstrap a garden variety contract claim into a tort.

Under New York law, an actuary is not deemed a “professional” for purposes of a malpractice cause of action and no case authorities saddle an actuary with a legal duty to its client extraneous to a contract. In addition, the court found the alleged breach did not involve “catastrophic consequences,” a “cataclysmic occurrence” or a “significant public interest” – all established bases for a finding of an extra-contractual duty.

Next, and while tacitly invoking Hadley v. Baxendale, [1854] EWHC Exch J70, the seminal 19th Century British court case involving consequential damages, the appeals court jettisoned the plaintiff’s lost revenues claim.

Breach of contract damages aim to put the plaintiff in the same financial position he would have occupied had the breaching party performed. “General” contract damages are those that are the “natural and probable consequence of” a breach of contract. Lost profits are unrecoverable consequential damages where the losses stem from collateral business arrangements.

To recover lost revenues as consequential damages, the plaintiff must establish (1) that damages were caused by the breach, (2) the extent of those damages with reasonable certainty, and (3) the damages were within the contemplation of the parties during contract formation.

To determine whether consequential damages were within the parties’ reasonable contemplation, the court looks to the nature, purpose and peculiar circumstances of the contract known by the parties and what liability the defendant may be supposed to have assumed consciously.

The court found that plaintiffs lost revenues were not damages naturally arising from defects in actuarial performance. Instead, it held those claimed damages were twice removed from the breach: they stemmed from plaintiff’s contracts with its member insureds. And since there was no evidence the parties contemplated the defendant would be responsible for the plaintiff’s lost revenues if the defendant breached the actuarial services agreement, the plaintiff’s lost profits damage claim was properly dismissed.

Afterwords:

MVP provides a useful primer on breach of contract damages, when lost profits are recoverable as general damages and the economic loss rule.
The case cements the proposition that where there is nothing inherent in the contract terms or the parties’ relationship that gives rise to a legal duty, the non-breaching party likely cannot augment its breach of contract action with additional tort claims.

Class Plaintiffs’ Consumer Fraud Claim Against Headphone Maker Survives Motion to Dismiss

The class action plaintiffs in Zak v. Bose Corp., 2019 WL 1437909 (N.D.Ill. 2019) sued the Massachusetts-based headphone behemoth claiming its mobile application (“App”) secretly intercepted plaintiffs’ music selections and sold the information to a third party.

Plaintiffs sued under the Federal wiretap act, and lodged state law claims under Illinois’s eavesdropping and consumer fraud statutes. Bose moved to dismiss the entire Complaint.

Partially granting and partially denying Bose’s motion, the Northern District provides a useful summary of the overlap between Federal wiretap and State law eavesdropping claims and engages in a creative and decidedly post-modern application of the Illinois Consumer Fraud Act, 815 ILCS 505/2 et seq. (the “CFA”).

Plaintiffs alleged that when they selected music to be streamed to their smartphones, Bose’s App “recorded” the selected song, artist and album while in transit to Spotify (or similar music streamers) and sold that data to a data miner.  According to plaintiffs, Bose used the recorded information to create detailed user profiles without his/her consent.

Federal Wiretap and State Eavesdropping Claims

The Federal Wiretap Act (18 U.S.C. s. 2511(a) and Illinois’s Eavesdropping statute, 720 ILCS 5/14-2(a) outlaw the interception (or attempts to intercept) of any electronic communication.

Liability under each statute only attaches to intercepted electronic communications by someone who is not party to the communication.

There is no wiretap or eavesdropping liability for a person who is party to a communication or where a party gives prior consent to the interception of the communication.

The Court rejected plaintiffs’ wiretap and eavesdropping claims as Bose was a party to the communication. The Court found that Bose “participated” in the user-to-streamer communication by first conveying the user’s song selection to the streamer and then processing the streamer’s song information back to the user.

Since the main purpose of the App was to facilitate communication between a headphone consumer and Spotify, the plaintiff failed to sufficiently allege that Bose was not a participant in the underlying communications.

Illinois Consumer Fraud Act

The plaintiffs’ consumer fraud claim survived.  The CFA prohibits “unfair or deceptive acts or practices” including the misrepresentation, omission or concealment of a material fact. 815 ILCS 505/2.

To state a CFA claim, the plaintiff must allege: (1) a deceptive act or practice by defendant, (2) defendant’s intent that plaintiff rely on the deception, (3) the deception occurred in the course of conduct involving trade or commerce, and (4) actual damage to the plaintiff as a result of the deception.

A colorable CFA claim also requires that the plaintiff actually be deceived by a defendant’s statement or omission – a plaintiff must actually receive a communication from the defendant.

For an omission to be actionable, it must involve a “material fact.”  A fact is material where it is information a reasonable buyer would be expected to rely on in deciding whether to purchase a product or one that would have led a buyer to act differently had it known of the omitted fact.

The Court found the plaintiffs sufficiently stated a CFA claim.  Plaintiffs pled a deceptive act by alleging that Bose advertised the headphones and App on its packaging and website, and omitted that the App secretly collected user data which was then sold to a third party.

The plaintiffs also adequately pled that the deceptive act was material as plaintiffs would not have purchased Bose products and installed the App had they known defendants were going to secretly collect and transmit plaintiffs’ streamed music choices.

Finally, according to the Court, plaintiffs adequately alleged both Bose’s intention that Plaintiffs rely on the omission “because it knew that consumers would not otherwise purchase their products” and actual damages – that Bose charged a higher price for its products and plaintiffs wouldn’t have bought the products had they known the App would collect and disclose their information. [*6]

The Court rejected Bose’s arguments that the alleged deceptive act didn’t relate to a material fact and the plaintiffs’ failed to plead actual damages since they did not ascribe a value to the “free and optional” App. The Court held that whether an alleged statement or omission is material is not properly decided on a motion to dismiss.

On the damages question, the Court credited class plaintiffs’ allegations that they paid $350 for the headphones in part because of the App and would not have done so had they known about the App’s information tracking.

Take-aways:

Zak and cases like it lie at the confluence of consumer law, tort law and cyber security. Aside from presenting a useful summary of the Illinois consumer fraud act as well as the Federal wiretap law, the case showcases the liberal pleading plausibility standard that governs Rule 12(b)(6) motions.

While it is unclear whether plaintiffs will ultimately win, Zak demonstrates that so long as a consumer fraud plaintiff pleads at least some facts in support of its omission claim, it can likely survive a motion to dismiss.

Fourth Circuit Considers Reverse Piercing, Charging Orders, and Jurisdictional Challenges in Pilfered Cable Case

Sky Cable v. Coley (http://www.ca4.uscourts.gov/opinions/161920.P.pdf) examines the interplay between reverse piercing the corporate veil, the exclusivity of the charging order remedy, and jurisdiction over an unserved (with process) LLC based on its member’s acts.

In 2011, the plaintiff cable distributor sued two LLCs affiliated with an individual defendant (“Individual Defendant”) who was secretly supplying cable TV to over 2,000 rooms and pocketing the revenue.

After unsuccessfully trying to collect on a $2.3M judgment, plaintiff later moved to amend the judgment to include three LLCs connected to the Individual Defendant under a reverse veil-piercing theory. The Individual Defendant and one of the LLCs appealed the District Court order that broadened the scope of the judgment.

Affirming, the Fourth Circuit, applying Delaware law, found that the District Court properly reverse-pierced the Individual Defendant to reach LLC assets.

‘Reverse’ Veil Piercing

Unlike traditional veil piercing, which permits a court to hold an individual  shareholder personally liable for a corporate judgment, reverse piercing attaches liability to the entity for a judgment against a controlling individual. [10, 11]

Reverse piercing is especially apt in the one-member LLC context as there is no concern about prejudicing the rights of others LLC members if the LLC veil is pierced.

In predicting that a Delaware court would recognize reverse piercing, the Court held that if Delaware courts immunized an LLC from liability for a member’s debts, LLC members could hide assets with impunity to shirk creditors. [18, 19]

Charging Order Exclusivity?

The Court also rejected the Individual Defendant’s argument that Delaware’s charging statute, 6 Del. Code s. 18-703 was the judgment creditor’s exclusive remedy against an LLC member.

Delaware’s charging statute specifies that attachment, garnishment and foreclosure “or other legal or equitable remedies” are not available to the judgment creditor of an LLC member.

However, the Court found that piercing “is not the type of remedy that the [charging statute] was designed to prohibit” since the piercing remedy differs substantively from the creditor remedies mentioned in the charging statute.  The Court found that unlike common law creditor actions aimed at seizing a debtor’s property – piercing (or reverse-piercing) challenges the legitimacy of the LLC entity itself. As a result, the Court found that the plaintiff wasn’t confined to a charging order against the Individual Defendant’s LLC distributions.

The Court further held that applying Delaware’s charging law in a manner that precludes reverse piercing would impede Delaware’s interest in preventing its state-chartered corporate entities from being used as “vehicles for fraud”
by debtors trying to escape its debts. [20-22]

Alter Ego Finding

The Court also agreed with the lower court’s finding that the LLC judgment debtor was the Individual Defendant’s alter ego.  In Delaware, a creditor can establish does not have to show actual fraud. Instead, it (the creditor) can establish alter ego liability by demonstrating a “mingling of the operations of the entity and its owner plus an ‘overall element of injustice or unfairness.” [24-25]

Here, the evidence in the record established that the Individual Defendant and his three LLCs operated as a single economic unit.  The Court also noted the Individual Defendant’s failure to observe basic corporate formalities, lack of accounting records and obvious commingling of funds as alter ego signposts.

The most egregious commingling examples cited by the court included one LLC paying another entity’s taxes, insurance and mortgage obligations. The Court found it suspicious (to say the least) that the individual Defendant took mortgage interest deductions on his personal tax returns when an LLC was ostensibly paying a separate LLC’s mortgage.

Still more alter ego evidence lay in Defendant’s reporting an LLC’s profit and loss on his individual return. Defendant also could not explain at his deposition what amounts he received as income from the various LLCs.

Can LLC Member’s Post-Judgment Acts Subject LLC to Jurisdiction?

The Court also affirmed the District Court’s exercise of jurisdiction over the LLC judgment debtor based on the Individual Defendant’s acts even though the LLC was never served with process in the underlying suit.

Normally, service of summons and the operative pleading on a defendant is a precondition to a court’s exercise of personal jurisdiction over him. However, a court has “vicarious jurisdiction” over an individual where his corporate alter ego is properly before the court.  In such a case, an individual’s jurisdictional contacts are imputed to the alter ego entity.

The reverse can be true, too: where an LLC’s lone member is already before the Court, there is no concern that the LLC receive independent notice (through service of summons, e.g.) of the litigation. (This is because there are no other members to give due process protections to.)

Applying these rules, the Fourth Circuit found jurisdiction over the LLC was proper since the Individual Defendant appeared and participated in post-judgment proceedings. [30-36]

Afterwords:

Sky Cable presents a thorough discussion of the genesis and evolution of reverse veil-piercing and a creditor’s dogged and creative efforts to reach assets of a single-member LLC.

Among other things, the case makes clear that where an LLC is so dominated and controlled by one of its members at both the financial and business policy levels, the LLC and member will be considered alter egos of each other.

Another case lesson is that a judgment creditor of an LLC member won’t be limited to a charging order where the creditor seeks to challenge the LLC’s legitimacy; through either a traditional piercing or non-traditional reverse-piercing remedy.

Limitation of Damages Clause Doesn’t Bar Trade Secrets, Copyright Claims – IL ND

A Federal district court in Illinois recently addressed the scope of a limitation of damages provision in a dispute over automotive marketing software. The  developer plaintiff in Aculocity, LLC v. Force Marketing Holdings, LLC, 2019 WL 764040 (N.D. Ill. 2019), sued the marketing company defendant for breach of contract – based on the defendant’s failure to pay for plaintiff’s software – and joined statutory copyright and trade secrets claims – based on the allegation that the defendant disclosed plaintiff’s software source code to third parties.

The defendant moved for partial summary judgment that plaintiff’s claimed damages were foreclosed by the contract’s damage limitation provision. The court denied as premature since no discovery had been taken on plaintiff’s claimed damages.

The agreement limited plaintiff’s damages to the total amount the software developer plaintiff was to be paid under the contract and broadly excluded recovery of any “consequential, incidental, indirect, punitive or special damages (including loss of profits, data, business or goodwill).”  The contractual damage limitation broadly applied to all contract, tort, strict liability, breach of warranty and failure of essential purpose claims.

In Illinois, parties can limit remedies and damages for a contractual breach if the agreement provision is unambiguous and doesn’t violate public policy.

Illinois law recognizes a distinction between direct damages and consequential damages. The former, also known as “general damages” are damages that the law presumes flow from the type of wrong complained of.

Consequential damages, by contrast, are losses that do not flow directly and immediately from a defendant’s wrongful act but result indirectly from the act. Whether lost profits are considered direct damages depends on their (the lost profits) degree of foreseeability. In one oft-cited case, Midland Hotel Corp. v. Reuben H. Donnelley Corp., 515 N.E.2d 61, 67 (Ill.1987), the Illinois Supreme Court held that a plaintiff’s lost profits were direct damages where the publisher defendant failed to include plaintiff’s advertisement in a newly published directory.

The District Court in Aculocity found that whether the plaintiff’s lost profits claims were direct damages (and therefore outside the scope of the consequential damages disclaimer) couldn’t be answered at the case’s pleading stage.  And while the contract specifically listed lost profits as an example of barred consequential damages, this disclaimer did not apply to direct lost profits. As a result, the Court denied the defendant’s motion for partial summary judgment on this point. [*3]

The Court also held that the plaintiff’s statutory trade secrets and copyright claims survived summary judgment. The Court noted that the contract’s damage limitation clause spoke only to tort claims and contractual duties. It was silent on whether the limitation applied to statutory claims – claims the court recognized as independent of the contract. [*4] Since the clause didn’t specifically mention statutory causes of action, the Court refused to expand the limitation’s reach to plaintiff’s copyright and trade secrets Complaint counts.

Take-aways:

Aculocity and cases like it provide an interesting discussion of the scope of consequential damage limitations in the context of a lost profits damages claim. While lost profits are often quintessential consequential damages (and therefore defeated by a damage limitation provision), where a plaintiff’s lost profits are foreseeable and arise naturally from a breach of contract, the damages will be considered general, direct damages that can survive a limitation of damages provision.

‘Zestimates’ Are Estimates; Not Fraud – 7th Circuit

The Seventh Circuit recently affirmed the Illinois Northern District’s Rule 12(b)(6) dismissal of class action plaintiffs’ fraudand deceptive practices claims against the owners of the Zillow.com online real estate valuation site.

The lower court in Patel v. Zillow, Inc. found the plaintiffs failed to sufficiently allege colorable consumer fraud and deceptive trade practices claims based mainly on the site’s “Zestimate” feature – an algorithm-based property estimator program.

The plaintiffs alleged Zillow scared off would-be buyers by undervaluing properties.  When Zillow refused plaintiffs request to remove the low-ball estimates, plaintiffs sued under various Illinois consumer statutes.  

Plaintiffs first alleged Zillow violated the Illinois Real Estate Appraiser Licensing Act, 225 ILCS 458/1 et. seq. (the “Licensing Act”) by performing appraisals without a license.  In their fraud and deceptive practices complaint counts, plaintiffs alleged Zillow used distorted property value estimates to tamp down true property values and engaged in false advertising by giving preferential listing treatment to sponsoring real estate brokers and lenders.

The Seventh Circuit affirmed dismissal of the plaintiffs’ Licensing Act claim on the ground that the Licensing Act doesn’t provide for a private cause of action.  Instead, the statute is replete with administrative enforcement provisions (fines of up to $25K) and criminal penalties (Class A misdemeanor for first offense; Class 4 felony for subsequent ones) for violations.  Since there was no express or implied private right of action for the Licensing Act violation, that claim failed. [3]

Jettisoning the plaintiffs’ statutory Deceptive Trade PracticesAct and Consumer Fraud Act claims (815 ILCS 510/1 et seq.; 815 ILCS 505/1 et seq., respectively), the Seventh Circuit agreed with the lower court that Zestimates were not actionable statements of fact likely to confuse consumers.

Instead, like its name suggests (‘estimate’ is “built in”), a Zestimate is simply estimates of a property’s value.    This point is confirmed by Zillow’s disclaimer-laden site that makes clear it is only a “starting point” for determining property values.  

Expanding on the deceptive practices and consumer fraud claim deficits, the Court disagreed with plaintiffs’ thesis that removing faulty valuations would improve the algorithm’s overall accuracy.  The Court noted that if Zillow was forced to remove estimates each time someone disagreed with a published value, it would “skew distribution,” dilute the site’s utility and either unfairly benefit or penalize buyers or sellers; depending on whether the retracted data was accurate. [4]

Turning to plaintiffs’ false advertising component of its claims, the Seventh Circuit held that all web and print publications rely on ad revenue to finance operations.  The mere fact that Zillow sold ad space didn’t transmute property estimates into verifiable (therefore, actionable) factual assertions.  Zestimates are estimates: “Zillow is outside the scope of the trade practices act.” [5]

Afterwords

The Seventh Circuit’s Zillow opinion cements the proposition that an actionable deceptive trade practices and consumer fraud claim requires a defendant’s assertion of a verifiable fact to be actionable.  

The case also confirms where a statute – like the Licensing Act – sets out a diffuse administrative and criminal enforcement scheme, a court will not imply a private right of action based on a statutory violation.

 

Possible Problematic Lien Notice Starts Limitations Clock in Lawyer ‘Mal’ Case

In Construction Systems, Inc. v. FagelHaber LLC, 2019 IL App (1st) 172430, the First District affirmed the time-barring of a legal malpractice suit stemming from a flubbed contractor’s lien filing.

Several months after a lender recorded its mortgage on a commercial project, the law firm defendant, then representing the plaintiff contractor, served a Section 24 notice – the Illinois mechanics’ lien act provision that governs subcontractor liens. 770 ILCS 60/24.  While the notice was served on the project owner and general contractor, it didn’t name the lender.  In Illinois, where a subcontractor fails to serve its lien notice on a lender, the lien loses priority against the lender.

After the contractor settled its lien claim with the lender’s successor, it sued the defendant law firm for malpractice. The contractor plaintiff alleged that had the law firm properly perfected the lien, the plaintiff would have recovered an additional $1.3M.

Affirming summary judgment for the defendant law firm, the First District agreed with the trial court and held that plaintiff’s legal malpractice suit accrued in early 2005. And since plaintiff didn’t sue until 2009, it was a couple years too late.

The Court based its ruling mainly on a foreboding February 2005 letter from plaintiff’s second counsel describing a “problematic situation” – the lender wasn’t notified of plaintiff’s subcontractor lien. The court also pointed out that plaintiff’s second attorney testified in her deposition that she learned of possible lien defects in February 2005; some four years before plaintiff filed suit.

Code Section 13-214.3(b) provides for a two-year limitations period for legal malpractice claims starting from when a plaintiff “knew or reasonably should have known of the injury for which damages are sought.” [⁋ 20]

A plaintiff’s legal malpractice case normally doesn’t accrue until he/she sustains an adverse judgment, settlement or dismissal. An exception to this rule is where it’s “plainly obvious” a plaintiff has been injured as a result of professional negligence.

The court rejected plaintiff’s argument that it never discovered the lien defect until 2007 when the lender’s successor filed its summary judgment motion (which argued that the lien was defective as to the lender). According to the court “the relevant inquiry is not when [Plaintiff] knew or should have known about the lack of notice as an actual defense, but when [Plaintiff] should have discovered [Defendant’s] failure to serve statutory notice of the mechanic’s lien on [the prior lender] prompting it to further investigate [Defendant’s] performance.” [⁋ 24]

The court again cited the above “problematic situation” letter as proof that February 2005 (when the letter was sent) was the triggering date for plaintiff’s claim. Another key chronological factor was the plaintiff’s 2005 payment of attorneys’ fees.

In Illinois, a malpractice plaintiff must plead and prove damages and the payment of attorneys’ fees can equate to damages when the fees are tied to a former counsel’s neglect. Since plaintiff paid its second counsel’s fees in 2005 for work she performed in efforts to resuscitate the lien’s priority, 2005 was the limitation period’s triggering date. [⁋ 25]

Construction Systems cites Nelson v. Padgitt, 2016 IL App (1st) 160571, for the proposition that a plaintiff does not have to suffer an adverse judgment to sustain legal malpractice injury. In Nelson, an employment contract dispute, the Court held that the plaintiff should have discovered deficiencies in his employment contract (it provided for the loss of salary and commissions in the event of for-cause termination) in 2012 when he sued his former employer, not in 2014 when the employer won summary judgment.

The Court also rejected plaintiff’s argument that its damages were unknown until the lien litigation was finally settled and that it couldn’t sue until the lien dispute was resolved. The court held that the extent and existence of damages are different things and that it’s the date a plaintiff learns he/she was damaged, not the amount, that matters.

Lastly, the court nixed plaintiff’s judicial estoppel concern – that plaintiff couldn’t argue the lien was valid in the underlying case while arguing the opposite in the malpractice suit. According to the court, the plaintiff could have entered into a tolling agreement that would suspend the statute of limitations pending the outcome of the underlying case.

Conclusion

Construction Systems reaffirms that a legal malpractice claim can accrue before an adverse judgment is entered or an opponent files a formal pleading that points out claim defects.  Moreover, the payment of attorneys’ fees directly attributable to a former counsel’s neglect is sufficient to meet the damages prong of a legal malpractice case.

This case and others like it also make clear that the limitations period runs from the date a plaintiff learns she has been injured; not when financial harm is specifically quantified.

To preserve a possible malpractice claim while a plaintiff challenges an underlying adverse ruling, practitioners should consider tolling agreements to suspend any statutes of limitation and guard against possible judicial estoppel concerns (taking inconsistent positions in separate lawsuits).

‘Mandatory’ Forum Selection Clause Given Cramped Construction By IL Court (applying Ohio Law) in Hand Lotion Contract Spat

In my experience, when final contracts refer to earlier agreements between the parties, it can present fertile ground for textual conflicts.  Example: I once litigated a severance dispute where the operative employment agreement provided Delaware law (and fixed venue there, too) and incorporated two prior non-compete agreements.  One agreement contained a Nebraska forum clause while the other non-compete said New York law governed.  Much ink was spilled fleshing out the proper place to sue.

Sloan Biotechnology Laboratories, LLC v. Advanced Biomedical Inc., 2018 IL App (3d) 170020 examines the factors a court considers when deciding which of two paradoxical forum clauses apply.

The plaintiff there agreed to supply hand sanitizer product to the defendant pursuant to a 2015 Manufacturing Agreement (“2015 Agreement”). The 2015 Agreement incorporated a 2014 non-disclosure agreement (the “2014 NDA”)

The 2015 Agreement provided that Illinois law applied and identified Peoria, Illinois as the site of the contract. The incorporated 2014 NDA, in turn, contained both permissive and mandatory forum selection clauses, both of which fixed venue in Cuyahoga County, Ohio. The permissive forum clause simply stated Ohio law would govern and that it (the 2014 NDA) “may be enforced” in Ohio state court. The mandatory clause, found in the 2014 NDA’s “equitable remedies” section, provided that the scope and extent of any injunctive relief “shall be determined” by Cuyahoga County, Ohio state court. The trial court granted the Ohio defendant’s motion to dismiss the complaint and found that Ohio was the proper forum for the lawsuit. The plaintiff appealed.

Applying Ohio law, the Illinois appeals court reversed.  It first recognized the existence of both permissive and mandatory forum selection clauses. The former allows parties to submit their disputes to a designated forum but doesn’t prohibit litigation elsewhere. The latter, mandatory provision, provides the exclusive forum for litigation. Use of the word “may” denotes a permissive forum clause while “shall” signifies a mandatory one. [⁋ 26]

In Ohio, a forum selection clause brokered between two sophisticated commercial entities is prima facie valid, so long as it was bargained for freely. To set aside a commercial forum selection clause, the challenger must make a “strong showing.”

A court will reject a commercial forum selection clause where (1) it results from fraud or overreaching or (2) its enforcement is unreasonable and essentially deprive a party of its day in court.

However, a challenger’s bare allegation that it’s inconvenient to litigate in another state isn’t enough to nullify a freely bargained for forum selection clause.

Like Illinois, Ohio utilizes the four-corners rule to contract interpretation. That is, contractual terms are to be ascribed their common, ordinary meanings and a court will not go beyond the plain language (or “four corners”) of the document to divine its meaning.

Applying these principles, the Court noted that the mandatory forum clause was narrowly drafted and only applied to questions of injunctive relief for NDA violations.  And since plaintiff’s lawsuit was not premised on a violation of the 2014 NDA (it was a declaratory judgment suit), the mandatory forum selection clause didn’t apply. As a consequence, the appeals court held there was nothing preventing the plaintiff from suing in Peoria County Illinois.

Afterwords:

Sloan represents a court rigidly enforcing a forum selection clause where the contracting parties are commercially sophisticated entities and there is no fraud or defect in contract formation.

The party challenging a forum clause must make a strong showing and offer more than inconvenience as the reason to reject the clause.

This case and others like it starkly illustrate the confusion that can result when multiple contracts (with diffuse forum clauses) reference and adopt each other.

If the different agreements involved here contained some forum consistency, a lot of time and money on a satellite issue (where to file suit) likely could have been saved.

High-Tech Sports Equipment Plaintiff Alleges Viable Fraud Claim Against Electronic Sensor Supplier (Newspin v. Arrow – Part II)

In Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272, the Seventh Circuit affirmed the dismissal of plaintiff’s negligent misrepresentation claims but upheld its fraud claims.

Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was factually inaccurate, and (3) plaintiff’s reasonable reliance on the information.

New York’s economic loss rule softens the negligent misrepresentation theory, however. This rule prevents a plaintiff from recovering economic losses under a tort theory. Since the plaintiff’s alleged negligence damages – money it lost from the flawed electronic components – mirrored its breach of contract damages, the negligent misrepresentation claim was barred by the economic loss rule. [*10]

Plaintiff’s fraud claims fared better.  In New York, a fraud claim will not lie for a simple breach of contract.  That is, where the only “fraud” alleged is a defendant’s broken promise or lack of sincerity in making a promise, the fraud claim merely duplicates the breach of contract one.

To allege a fraud claim separate from a breach of contract, a plaintiff must establish (1) a legal duty separate from the duty to perform under a contract, or (2) demonstrate a misrepresentation collateral or extraneous to the contract, or (3) special damages caused by the misrepresentation that are not recoverable as contract damages. [*11] [32]-[33].

Applying these principles, the Court noted that the plaintiff alleged the defendant made present-tense factual representations concerning its experience, skill set and that its components met plaintiff’s specifications.  Taken together, these statements – if true – sufficiently pled a legal duty separate from the parties’ contractual relationship to state a colorable fraud claim.

The Court also rejected the defendant’s argument that the plaintiff’s fraud claims were subject to the UCC’s four-year limitations period governing sales of goods contracts.  Since the plaintiff’s fraud count differed from its breach of contract claim, Illinois’s five-year statute of limitations for common law fraud governed.  See 735 ILCS 5/13-205,  As a result, plaintiff’s 2017 filing date occurred within the five-year time limit and the fraud claim was timely. [*12] [35].

Afterwords:

The economic loss rule will bar a negligent misrepresentation claim where a plaintiff’s pleaded damages simply restate its breach of contract damages;

A fraud claim can survive a pleadings motion to dismiss so long as the predicate allegations go beyond the subject matter of the contract governing the parties’ relationship.

High-Tech Sports Co.’s Warranty Claims Too Late Says Seventh Circuit (Newspin v. Arrow Electronics – Part I of II)

Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272 (7th Cir. 2018), analyzes the goods-versus-services dichotomy under the Uniform Commercial Code (UCC) and how that difference informs the applicable statute of limitations.

The defendant supplied electronic sensor components for plaintiff’s use in its high-tech sports performance products.  Plaintiff sued when most of the parts were faulty and didn’t meet Plaintiff’s verbal and written requirements.  Plaintiff brought both contract- and tort-based claims against the Plaintiff.

The Breach of Contract Claims

The Seventh Circuit affirmed the dismissal of the contract claims on the basis they were time-barred under the UCC’s four-year limitations period for the sale of goods.

In Illinois, a breach of written contract claimant has ten years to sue measured from when its claim accrues. 735 ILCS 5/13-206.  A claim accrues when the breach occurs, regardless of the non-breaching party’s lack of knowledge of the breach.  For a contract involving the sale of “goods,” a shortened 4-year limitations period applies. 810 ILCS 5/2-102 (goods df.), 810 ILCS 5/2-725(2)(4-year limitations period).

With a mixed contract (an agreement involving the supply of goods and services), Illinois looks at the contract’s “predominant purpose” to determine whether the 10-year or the compressed 4-year limitations period governs.

To apply the predominant purpose test, the court looks at the contract terms and the proportion of goods to services provided for under the contract.  The court then decides whether the contract is mainly for goods with services being incidental or if its principally for services with goods being incidental.

Here, the Court noted the Agreement was a mixed bag: the defendant promised to provide both goods and services.  But various parts of the contract made it clear that the defendant was hired to first provide a prototype product and later, to furnish components pursuant to plaintiff’s purchase orders.  The court found that any services referenced in the agreement were purely tangential to the main thrust of the contract – defendant’s furnishing electronic sensors for plaintiff to attach to its client’s golf clubs.  Support for this finding lay in the fact that the Agreement set out specific quantity and price terms for the goods (the components) but did not so specify for the referenced assembly, manufacturing and procurement services.

Other Agreement features that led to the court ruling the Agreement was one for goods included its warranty, sales tax, “F.O.B. and title passing provisions. The court noted that the warranty only applied to the manufactured products and not to any services and the contract’s sales tax provision – making Plaintiff responsible for sales taxes –  typically applied in goods contracts, not services ones.

Additionally, the Agreement’s F.O.B. (“free on board”) and title passage terms both signaled this was a goods (not a services) deal. See 810 ILCS 5/2-106(1)(sale consists in passing title from seller to buyer for a price). [*5]

Since the plaintiff didn’t sue until more than five years elapsed from the breach date, the Court affirmed the dismissal of plaintiff’s breach of contract, breach of implied covenant of good faith and fair dealing and breach of warranty claims.

The Negligent Misrepresentation Claim

The Seventh Circuit also affirmed dismissal of plaintiff’s negligent misrepresentation claim. Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was in fact incorrect, and (3) plaintiff’s reasonable reliance on the information.

Like Illinois, New York applies the economic loss rule. This precludes a plaintiff from recovering economic losses under a tort theory. And since the plaintiff’s claimed negligent misrepresentation damages – money it lost based on the component defects – mirrored its breach of contract damages, the economic loss rule defeated plaintiff’s negligent misrepresentation count. [*10]

Afterwords:

The case presents a useful summary of the dispositive factors a court looks at when deciding whether a contract’s primary purpose is for goods or services.  Besides looking at an agreement’s end product (or service), certain terms like F.O.B., title-shifting and sales tax provisions are strong indicators of contracts for the sale of goods.

The case also demonstrates the continuing viability of the economic loss rule.  Where a plaintiff’s breach of contract damages are identical to its tort damages, the economic loss rule will likely foreclose a plaintiff’s tort claim.

 

Photo Album Inventor’s Trade Secrets Case Survives Summary Judgment – IL ND

The Northern District recently discussed the reach of the apparent agency doctrine along with trade secret abandonment in a spat over a photo album device.

The plaintiff in Puroon, Inc. v. Midwest Photographic Resource Center, Inc., 2018 WL 5776334 (N.D.Ill. 2018), invented the Memory Book, a “convertible photo frame, album and scrapbook” whose key features included embedded magnet technology (to keep pictures in place) and an interchangeable outside view.

The plaintiff sued the defendant photo-album seller when plaintiff learned the defendant was selling a product similar to the Memory Book. Defendant opposed the suit, claiming it independently created the analogous album product.  Both sides moved for summary judgment motion on multiple claims.

Apparent Agency

The salient agency issue on plaintiff’s breach of contract claim was whether a third-party who performed manufacturing services for the defendant and to whom the plaintiff sent some photo book samples was the defendant’s apparent agent If so, defendant was potentially liable on plaintiff’s breach of contract claim which asserted defendant went back on its promise to build Memory Book prototypes.

In Illinois, a statement by a purported agent alone cannot create apparent authority. Instead, for apparent authority to apply, the court looks to statements or actions of the alleged principal, not the agent. Once a litigant establishes that an agent has authority to bind a principal, the agents’ statements are admissible as an agent’s statement made within the scope of the agency. See Fed. R. Evid. 801(d)(2)(D)(a statement is not hearsay if offered against opposing party and made by party’s agent or employee on a matter within the scope of that relationship while it existed.) [*5]

Here, there was record evidence that a high-ranking employee of defendant referred to both defendant and the manufacturer as “we” in emails. The court viewed this as creating the impression in a reasonable juror that the manufacturer was an agent of defendant.

Because of this fact question – was the manufacturer the defendant’s agent? – both parties’ summary judgment motions were denied on plaintiff’s breach of contract claim.

Trade Secret Misappropriation

The bulk of the opinion focuses on whether the plaintiff sufficiently established that its Memory Book device qualified for trade secret protection and whether there was enough misappropriation evidence to survive summary judgment. The Court answered (a muted) “yes” on both counts.

The court refused to attach trade secret protection to the Memory Book’s embedded magnets feature; the Court noted that magnets had been used extensively in other photo container products.

The Court did, however, afford trade secret protection to plaintiff’s manufacturing specifications.  It found the ‘specs’ secret enough to give plaintiff a competitive advantage.  The Court also noted that plaintiff supplied the specs to defendant only after it signed an NDA.  This was enough for the plaintiff to take its trade secrets claim to a jury and survive summary judgment.

Trade Secret Abandonment

The Court rejected defendant’s argument that plaintiff abandoned its trade secrets by sending samples to retailers and presenting Memory Book at trade shows.

It stated that the trade show attendees could not have identified the Memory Book’s manufacturing specifications merely by looking at the device or handling a sample. The court also credited plaintiff’s evidence that the album retailers weren’t provided with the Memory Book’s specs. The court opined that “reasonable steps for a two or three person shop may be different from reasonable steps for a larger company” and concluded that “[g]iven the fact that [Plaintiff] is a small, one-person company, a reasonable jury could find that [its]  efforts . . . were adequate to protect the Memory Book’s secrets.”

Afterwords:

Corporate entities should not too closely align themselves with third party independent contractors if they wish to avoid contractual liability on an agency theory;

Inventors should make liberal use of NDAs when sending prototypes to vendors, partners or retailers;

A smaller company can likely get away with less strenuous efforts to protect trade secrets than its bigger company counterparts.  The larger and more sophisticated the company, the more sedulous its efforts must be to protect its confidential data.

The ‘Procuring Cause’ Rule – Ill. Appeals Court Weighs In

The First District recently applied the ‘procuring cause’ doctrine to award the plaintiff real estate broker a money judgment based on a reasonable brokerage commission in Jameson Real Estate, LLC v. Ahmed, 2018 IL App (1st) 171534.

The broker provided the defendant with specifics concerning an “off market” car wash business and the land it sat on. The plaintiff later gave defendant a written brokerage contract for the sale of the car wash business and property that provided for a 5% sales commission.  The defendant never signed the contract.

After many months of negotiations, defendant orally informed plaintiff he no longer wished to buy the property and stopped communicating with plaintiff.

When plaintiff later learned that defendant bought the property behind plaintiff’s back, plaintiff sued to recover his 5% commission. The trial court directed a verdict for defendant on plaintiff’s express contract claims but entered judgment for plaintiff on his quantum meruit complaint count.  The money judgment was for an amount that was congruent with what a typical buyer’s broker – splitting a commission with a selling broker – would earn in a comparable commercial sale.

Quantum meruit, which means “as much as he deserves” provides a broker plaintiff with a cause of action to recover the reasonable value of services rendered but where no express contract exists between the parties.

A quantum meruit plaintiff must plead and prove (1) it performed a service to the benefit of a defendant, (2) that it did not perform the service gratuitously, (3) the defendant accepted the plaintiff’s service, and (4) no written contract exists to prescribe payment for the service.

The fine-line distinction between quantum meruit and unjust enrichment is that in the former, the measure of recovery is the reasonable value of work and material furnished, while in the unjust enrichment setting, the focus is on the benefit received and retained as a result of the improvement provided.  [¶ 61]

In the real estate setting, a quantum meruit commission recovery can be based on either a percentage of the sales price or the amount a buyer saved by excising a broker’s fee from a given transaction. [¶ 64]

Where a real estate broker brings parties together who ultimately consummate a real estate sale, the broker is treated as the procuring cause of the completed deal. In such a case, the broker is entitled to a reasonable commission shown by the evidence. A broker can be deemed a procuring cause where he demonstrates he was involved in negotiations and in disseminating property information which leads to a completed sale. [¶ 69]

The appeals court found the trial court’s quantum meruit award of $50,000, which equaled the seller’s broker commission and which two witnesses testified was a reasonable purchaser’s broker commission, was supported by the evidence. (Note – this judgment amount was less than half of what the broker sought in his breach of express contract claim – based on the unsigned 5% commission agreement.)

The Court rejected defendant’s ‘unclean hands’ defense premised on plaintiff’s failure to publicly list the property (so he could purchase it himself) and his lag time in asserting his commission rights.

The unclean hands doctrine prevents a party from taking advantage of its own wrong.  It prevents a plaintiff from obtaining legal relief where he is guilty of misconduct in connection with the subject matter of the litigation.  For misconduct to preclude recovery, it must rise to the level of fraud or bad faith. In addition, the misconduct must be directly aimed at the party against whom relief is sought.  Conduct geared towards a third party, no matter how egregious, generally won’t support an unclean hands defense.

Here, the defendant’s allegation that the plaintiff failed to publicly list the property, even if true, wasn’t directed at the defendant.  If anything, the failure to list negatively impacted the non-party property owner, not the defendant.

Afterwords:

In the real estate broker setting, procuring cause doctrine provides a viable fall-back theory of recovery in the absence of a definite, enforceable contract.

Where a broker offers witness testimony of a customary broker commission for a similar property sale, this can serve as a sufficient evidentiary basis for a procuring cause/quantum meruit recovery.

 

Faulty Service on LLC Defendant Dooms Administrative Agency’s Unpaid Wages Claim Versus Security Company

The Illinois Department of Labor’s (DOL) decision to send a notice of hearing to a limited liability company and its sole member to the member’s personal post office (p.o.) box (and not to the LLC’s registered agent) came back to haunt the agency in People of the State of Illinois v. Wilson, 2018 IL App (1st) 171614-U.

Reversing summary judgment for the DOL in its lawsuit to enforce an unpaid wages default judgment, the First District austerely applies the Illinois LLC Act’s (805 ILCS 180/1-1 et seq.) service of process requirements and voided the judgment for improper service.

Key Chronology:

February 2013: the DOL filed a complaint for violation of the Illinois Wage Payment and Collection Act (the Wage Act) against the LLC security firm and its member (the “LLC Member”);

January 2015: the DOL sends a notice of hearing by regular mail to both defendants to the LLC Member’s personal p.o. box;

March 2015: Defendants fail to appear at the hearing (the “2015 Hearing”) and DOC defaults the defendants;

June 2015: Defendants fail to pay the default amount and DOL enters judgment that tacks on additional fees and penalties;

February 2016: DOL files suit in Illinois Chancery Court to enforce the June 2015 administrative judgment;

March 2016, May 2016: Defendants respectively appear through counsel and move to dismiss the case for improper service of the 2015 Hearing notice;

June – July 2016: DOL concedes that service was deficient on the LLC defendant (the security company) and voluntarily dismisses the LLC as party defendant;

May 2017: DOL’s motion for summary judgment granted;

June 2017: LLC Member appeals.

The Analysis

The main issue on appeal was whether the DOL gave proper notice of the 2015 Hearing. It did not.

Under the law, lack of jurisdiction may be raised at any time; even past the 35-day window to challenge an agency’s decision under the Illinois Administrative Review Law, 735 ILCS 5/3-103.

Section 50 of the LLC Act provides that an LLC must be served (1) via its registered agent or (2) the Secretary of State under limited circumstances.

Secretary of State service on an LLC is proper where (1) the LLC fails to appoint or maintain a registered agent in Illinois; (2) the LLC’s registered agent cannot be found with reasonable diligence at either the LLC’s registered office or its principal place of business; OR (3) when the LLC has been dissolved, the conditions of (1) and (2) above exist, and suit is brought within 5 years after issuance of a certificate of dissolution or filing of a judgment of dissolution. 805 ILCS 180/1-50(a), (b)(1-3).

Here, the DOL mailed notice of the 2015 Hearing to the wrong party: it only notified the LLC Member. It did not serve the notice on the LLC’s registered agent or through the Secretary of State. As a result, the LLC was not properly served in the underlying wage proceeding.

The DOL argued that since the LLC Member was also sued as an individual “employer” under Sections 2 and 13 of the Act, service of the 2015 Hearing on the LLC Member was valid.

The Court disagreed. Under Sections 2 and 13 of the Act, an employer can be liable for its own violations and acts committed by its agents and corporate officers or agents can be liable where they “knowingly permit” an employer to violate the Act.

Corporate officers who have “operational control” of a business are deemed employers under the Act. However, an individual’s status as a lone member of an entity – like the LLC Member – is not enough to subject the member to personal liability.

Instead, there must be evidence the member permitted the corporate employer to violate the Act by not paying the compensation due the employee. Otherwise, the Court held, every company decision-maker would be liable for a company’s failure to pay an employee’s wages. [⁋⁋ 49-50]

And since the DOL hearing officer never made any specific findings that the LLC Member knowingly permitted the security company to violate the Act, there wasn’t enough evidence to sustain the trial court’s summary judgment for the DOL. [⁋ 51]

Afterwords:

Wilson starkly illustrates that the LLC Act’s service of process strictures have teeth. If a litigant fails to serve an LLC’s registered agent or the Secretary of State, any judgment stemming from the invalid service is a nullity.

In hindsight, the DOL probably should have produced evidence at the 2015 Hearing that the LLC Member (a) had operational control over the security firm; and (b) personally participated in the firm’s decision not to pay the underlying claimant’s wages. Had it done so, it may have been able to salvage its case and show that p.o. box service on the LLC Member was sufficient to subject her to the DOL’s jurisdiction.

15-Year ‘Course of Dealing’ Clarifies Oral Agreement for Tax Sale Notices – IL First Dist.

The would-be tax deed buyer in Wheeler Financial, Inc. v. Law Publishing Co., 2018 IL App (1st) 171495 claimed the publisher defendant’s erroneous sale date in a required tax sale notice thwarted its purchase of a pricey Chicago property.

A jury found for the publisher defendant on the buyer’s breach of oral contract claim since the plaintiff failed to properly vet the draft “Take Notice” (the statutory notice provided by a tax deed applicant that gives notice to the owner) supplied by the defendant before publication. The plaintiff appealed.

Affirming the jury verdict, the First District discusses the nature of express versus implied contracts, the use of non-pattern jury instructions and when course of dealing evidence is admissible to explain the terms of an oral agreement.

Course of dealing – Generally

There was no formal written contract between the parties. But there was a 15-year business relationship where the plaintiff would send draft tax deed petition notices to the defendant who would in turn, publish the notices as required by the Illinois tax code. This decade-and-a-half course of dealing was the basis for jury verdict for the publisher defendant.

Section 223 of the Restatement (Second) of Contracts defines a course of dealing as a sequence of previous conduct between parties to an agreement “which is fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.”

A course of dealing “gives meaning to or supplements or qualifies their agreement” and can be considered when determining the terms of an oral contract. Where contract terms are uncertain or doubtful and the parties have – by their conduct – placed a construction on the agreement that is reasonable, such a construction will be adopted by the court. [¶ ¶ 77-78]

Course of Dealing – The Evidence

Here, the course of dealing proof was found in both trial testimony and documents admitted in evidence.

At trial, current and former employees of the publisher defendant and plaintiff’s agent all testified it was the parties’ common practice for defendant to first provide draft Take Notices to plaintiff for its review and approval prior to publication. E-mails introduced in evidence at trial corroborated this practice.

In addition, plaintiff’s affiliated tax lien company’s own handbook contained a published policy of plaintiff reviewing all Take Notices for accuracy before the notices were published. [¶¶ 35, 83-85]

The appeals court agreed with the jury that the defendant sufficiently proved the parties course of dealing was that defendant would give plaintiff a chance to review the Take Notices before publication. And since the plaintiff failed to adhere to its contractual obligation to review and apprise the defendant of any notice errors, plaintiff could not win on its breach of contract claim. (This is because a breach of contract plaintiff’s prior material breach precludes it from recovering on a breach of contract claim.)

Jury Instructions and A Tacit Exculpatory Clause?

Since no Illinois pattern jury instruction defines “course of dealing,” the trial court instructed the jury based on Wald v. Chicago Shippers Ass’n’s (175 Ill.App.3d 607 (1988) statement that a prior course of dealing can define or qualify an uncertain oral agreement. [¶ 96] Since Wald accurately stated Illinois law on the essence and reach of course of dealing evidence, it was proper for the jury to consider the non-pattern jury instruction.

The court then rejected plaintiff’s argument that allowing the legal publisher to avoid liability was tantamount to creating an implied exculpatory clause. The plaintiff claimed that if the publisher could avoid liability for its erroneous notice date, the parties’ agreement was illusory since it allowed the defendant to breach with impunity.

The court disagreed. It held that the parties’ course of dealing created mutual obligations on the parties: plaintiff was obligated to review defendant’s Take Notices and advise of any errors while defendant was required to republish any corrected notices for free. These reciprocal duties placed enforceable obligations on the parties.

Afterwords:

Where specifics of an oral agreement are lacking, but the parties’ actions over time plainly recognize and validate a business relationship, a court will consider course of dealing evidence to give content to the arrangement.
Where course of dealing evidence establishes that a breach of contract plaintiff has assumed certain obligations, the plaintiff’s failure to perform those requirements will doom its breach of contract claim.

 

 

Nevada LLC Members’ Privilege to Tortiously Interfere with Business Relationships Has Limits – IL ND

When the former President of a lighting company started a competing venture, his former employer sued for damages under the Illinois Deceptive Trade Practices Act (IDTPA) and for breach of contract. The ex-President then countersued for unpaid commissions under the Illinois Wage Payment and Collection Act (IWPCA) and sued the individual members of the LLC plaintiff for tortious interference with advantageous business relationship. All parties moved to dismiss.

Green Light National, LLC v. Kent, 2018 WL 4384298, examines, among other things, the extra-territorial reach of the IWPCA and the scope of a corporate officer’s privilege to interfere with a rival’s business relationships.

An IDTPA plaintiff can only bring a claim where the wrongful conduct occurred “primarily and substantially in Illinois.” Factors include: (1) the place of plaintiff’s residence, (2) where the misrepresentation was made, (3) where the damage occurred, and (4) whether the plaintiff communicated with the defendant in Illinois.

Here, the court found factors (1) and (3) pointed toward Illinois as the locus of the challenged conduct. Plaintiff alleged the defendants used plaintiff’s lighting installations on the competitor’s website. And since plaintiff was an Illinois corporate entity, it was likely that plaintiff sustained damage in Illinois.  This made the case different from others where the lone connection to Illinois was a nationwide website. On the current record, the court wasn’t able to determine whether factors (2) and (4) weighed towards a finding that defendants’ misconduct happened in Illinois. As a result, the Court held that the plaintiff alleged a sufficient IDTPA claim to survive defendants’ motion to dismiss.

Next, the court sustained plaintiff’s breach of employment contract claim. The defendants moved to dismiss this claim on the basis that a 2013 Employment Agreement was superseded by a 2015 Operating Agreement which documented plaintiffs’ corporate restructuring. Under Illinois law, an earlier contract is superseded by a later contract where (1) both contracts deal with the same subject matter, (2) two contracts contain inconsistencies which evince the conclusion that the parties intended for the second contract to control their agreement and vitiate the former contract, and (3) the later contract reveal no intention of the parties to incorporate the terms of the earlier contract.

There were too many facial dissimilarities between the 2013 and 2015 documents for the court to definitively find that the former agreement merged into the latter one.

Turning to the defendant’s counterclaims, the Court sustained the tortious interference claim against two of the LLC members. In Illinois, corporate officers are protected from personal liability for acts committed on behalf of the corporation. Corporate officers and directors are privileged to use their business judgment in carrying out corporate business. So long as a corporate officer is acting in furtherance of a corporation’s legitimate business interest, the officer is shielded from individual liability. The same rule that protects corporate officers for decisions made on behalf of their company applies with equal force to LLC member decisions made for the LLC.

This LLC member privilege to interfere isn’t inviolable though.  Where the member acts maliciously – meaning intentionally and without justification – he abuses his qualified privilege. Here, the defendant alleged two LLC members made knowingly false statements about the defendant. These allegations, if true, were enough to make out a tortious interference with business relationships claim. The

The Court then denied the plaintiff’s motion to dismiss defendant’s IWPCA claim. The plaintiff argued that since defendant was not an Illinois resident, he couldn’t sue under the IWPCA since that statute lacks extraterritorial reach. The Court rejected this argument as Illinois law allows non-residents to sue under the IWPCA where they perform work in Illinois for an Illinois-based employer. The counter-plaintiff’s allegations that he made approximately 15 trips to Chicago over several months to perform work for the defendant was enough – at the motion to dismiss stage – to provide a hook for an IWPCA claim.

Afterwords:

1/ Where a later contract involves the same subject matter as an earlier contract and there are facial inconsistencies between them, a Court will likely find the later agreement supersedes the earlier one;

2/ Corporate officers (and LLC members) are immune from suit when taking action to pursue a legitimate business interest of the corporate entity. The privilege is lost though where a corporate officer engages in intentional and unjustified conduct;

3/ A non-resident can sue under the IWPCA where he/she alleges work was performed in Illinois for an Illinois employer.

Debtor’s Use of LLC As ‘Personal Piggy Bank’ Leads to Turnover and Charging Orders

Golfwood Square, LLC v. O’Malley, 2018 IL App(1st) 172220-U, examines the interplay between a charging order and a third party citation to discover assets turnover order against an LLC member debtor.  The plaintiff in Golfwood engaged in a years’ long effort to unspool a judgment debtor’s multi-tiered business entity arrangement in the hopes of collecting a sizeable (about $1M) money judgment.

Through post-judgment proceedings, the plaintiff learned that the debtor owned a 90% interest in an LLC (Subsidiary or Sub-LLC) that was itself the sole member of another LLC (Parent LLC) that received about $225K from the sale of a Chicago condominium.

Plaintiff also discovered the defendant had unfettered access to Parent LLC’s bank account and had siphoned over $80K from it since the judgment date.

In 2013 and 2017, plaintiff respectively obtained a charging order against Sub-LLC and a turnover order against Parent LLC in which the plaintiff sought to attach the remaining condominium sale proceeds.  The issue confronting the court was whether a judgment creditor could get a turnover order against a parent company to enforce a prior charging order against a subsidiary entity.  In deciding for the creditor, the Court examined the content and purpose of citations to discover assets turnover orders and LLC charging orders.

Code Section 2-1402 empowers a judgment creditor can issue supplementary proceedings to discover whether a debtor is in possession of assets or whether a third party is holding assets of a debtor that can be applied to satisfy a judgment.

Section 30-20 of the Limited Liability Company Act allows that same judgment creditor to apply for a charging order against an LLC member’s distributional interest in a limited liability company. Once a charging order issues from the court, it becomes a lien (or “hold”) on the debtor’s distributional interest and requires the LLC to pay over to the charging order recipient all distributions that would otherwise be paid to the judgment debtor. 735 ILCS 5/2-1402; 805 ILCS 180/30-20. Importantly, a charging order applicant does not have to name the LLC(s) as a party defendant(s) since the holder of the charging order doesn’t gain membership or management rights  in the LLC. [⁋⁋ 22, 35]

Under Parent LLC’s operating agreement, once the condominium was sold, Parent LLC was to dissolve and distribute all assets directly to Sub-LLC – Parent’s lone member.  From there, any distributions from Sub-LLC should have gone to defendant (who held a 90% ownership interest in Sub-LLC) and then turned over to the plaintiff.

However, defendant circumvented the charging order by accessing the sale proceeds (held in Parent LLC’s account) and distributing them to himself. The Court noted that documents produced during post-judgment discovery showed that the defendant spent nearly $80,000 of the sale proceeds on his personal debts and to pay off his other business obligations.

Based on the debtor’s conduct in accessing and dissipating Parent LLC’s bank account with impunity, and preventing Parent LLC from distributing the assets to Sub-LLC, where they could be reached by plaintiff, the trial court ordered the debtor to turn all Parent LLC’s remaining account funds over to the plaintiff to enforce the earlier charging order against Sub-LLC.

The court rejected the defendant’s argument that Parent LLC was in serious debt and that the condo sale proceeds were needed to pay off its debts. The Court found this argument clashed with defendant’s deposition testimony where he stated under oath that Parent LLC “had no direct liabilities.” This judicial admission – a clear, unequivocal statement concerning a fact within a litigant’s knowledge – was binding on the defendant and prevented him from trying to contradict this testimony. The argument also fell short in light of defendant’s repeatedly raiding Parent LLC’s account to pay his personal debts and those of his other business ventures all to the exclusion of plaintiff.

The court then summarily dispensed with defendant’s claim that the plaintiff improperly pierced the corporate veils of Parent LLC and Sub-LLC in post-judgment proceedings. In Illinois, a judgment creditor typically cannot pierce a corporate veil in supplementary proceedings. Instead, it must file a new action in which it seeks piercing as a remedy for an underlying cause of action.

The Court found that the trial court’s turnover order did not hold defendant personally liable for either LLC’s debt. Instead, the turnover order required Parent LLC to turnover assets belonging to the judgment debtor – the remaining condominium sale proceeds – to the plaintiff creditor.

Afterwords:

This case presents in sharp relief the difficulty of collecting a judgment from a debtor who operates under a protective shield of several layers of corporate entities.

Where a debtor uses an LLC’s assets as his “personal piggy bank,” Golfwood and cases like it show that a court won’t hesitate to vindicate a creditor’s recovery right through use of a turnover and charging order.

The case is also noteworthy as it illustrates a court looking to an LLC operating agreement for textual support for its turnover order.

7th Cir. Addresses Guarantor Liability, Ratification Doctrine in Futures Trading Snafu

Straits Financial v. Ten Sleep Cattle, 2018 WL 328767 (N.D.Ill. 2018) examines some signature business litigation issues against the backdrop of a commodities futures and trading account dispute. Among them are the nature and scope of a guarantor’s liability, the ratification doctrine as applied to covert conduct and the reach of the Illinois consumer fraud statute.

The plaintiff brokerage firm sued a Wyoming cattle rancher and his company to recover an approximate $170K deficit in the defendants’ trading account. (The defendants previously opened a non-discretionary account with plaintiff for the purpose of locking in future livestock prices.)

The ranch owner counter-sued, alleging a rogue trader of plaintiff made unauthorized trades with defendants’ money over a three-month period.  Defendants counter-sued for consumer fraud, breach of fiduciary duty and conversion. After a seven-day bench trial, the court entered a money judgment for the defendants and the plaintiff appealed.

In substantially affirming the trial court, the Seventh Circuit first tackled the plaintiff’s breach of guaranty claim.  In Illinois, guarantees are strictly construed and a guarantor’s liability cannot extend beyond that which he has agreed to accept.  A proverbial favorite of the law, a guarantor is given the benefit of any doubts concerning a contract’s enforceability.  A guarantor’s liability is discharged if there is a “material change” in the business dealings between the parties and an increase in risk undertaken by a guarantor.

Here, the speculative trading account (the one where the broker made multiple unauthorized trades) differed vastly in form and substance from the non-discretionary account.

Since the two trading accounts differed in purpose and practice, the Court held that it would materially alter the guarantor’s risk if he was penalized for the plaintiff’s broker’s fraudulent trading spree.  As a result, the Seventh Circuit affirmed the trial judge’s ruling for the defendant on the guarantee claim.

The Court then rejected plaintiff’s ratification argument: that defendants’ authorized the illegal churned trades by not timely objecting to them
An Illinois agency axiom posits that a person does not have an obligation to repudiate an illegal transaction until he has actual knowledge of all material facts involved in the transaction. Restatement (Third) of Agency, s. 4.06.

Illinois law also allows a fraud victim to seek relief as long as he renounces the fraud promptly after discovering it. A party attempting to undo a fraudulent transaction is excused from strict formalism, too.

Here, the ranch owner defendant immediately contacted the plaintiff’s broker when he learned of the improper trades and demanded the return of all money in the non-discretionary trading account. This, according to the Court, was a timely and sufficient attempt to soften the impact of the fraudulent trading.

The Court affirmed the trial court’s attorneys’ fees award to the defendants on its consumer fraud counterclaim. The Illinois Consumer Fraud Act, 815 ILCS 505/10a(c)(the “CFA”) allows a court to assess attorneys’ fees against the losing party.

The plaintiff argued that the trial judge errored by awarding attorneys’ fees expended by defendants in both CFA and non-CFA claims. Plaintiff contended  the trial judge should have limited his fee award strictly to the CFA claim.

Rejecting this argument, the Seventh Circuit noted that under Illinois law, where statutory fraud (which allow for fees) and common law (which don’t) claims arise from the same operative facts and involve the same evidence at trial, a court can award all fees; even ones involved in prosecuting or defending non-fee claims. And since facts tending to prove fraudulent trading “were woven throughout [the] case and the work done to develop those facts [could] not be neatly separated by claim,” the District court had discretion to allow defendants’ attorneys’ fees claim incurred in all of its counterclaims and defenses.

The Court then reversed the trial judge’s holding that the defendants failed to mitigate their damages by not reading plaintiff’s trading statements or asking about his accounts.  A breach of contract or tort plaintiff normally cannot stand idly by and allow an injury to fester without making reasonable efforts to avoid further loss.

But here, since the plaintiff’s broker committed fraud – an intentional tort – any “contributory negligence” resulting from defendant not reading the mailed statements wasn’t a valid defense to the rogue broker’s fraudulent conduct.

Afterwords:

This case shows the length a court will go to make sure a fraud perpetrator doesn’t benefit from his improper conduct.  Even if a fraud victim is arguably negligent in allowing the fraud to happen or in responding to it, the court will excuse the negligence in order to affix liability to the fraudster.

This case also illustrates how guarantors are favorites of the law and an increase in a guarantor’s risk or a marked change in business dealings between a creditor and a guarantor’s principal will absolve a guarantor from liability.

Finally, Ten Sleep shows that a prevailing party can get attorneys’ fees on mixed fee and non-fee claims where the same core of operative facts underlie them.

Earned Bonus Is Proper Subject of Employee’s Wage Payment Claim; Reliance on Employer Pre-Hiring Statements Is Reasonable – IL ND

After leaving a lucrative banking position in Florida for a Chicago consulting gig, Simpson v. Saggezza’s (2018 WL 3753431 (N.D.Ill. 2018) plaintiff soon learned the Illinois job markedly differed from what was advertised.

Among other things, the plaintiff discovered that the company’s pre-hiring revenue projections were off as were the plaintiff’s promised job duties, performance goals and bonus structure.

When plaintiff complained, the Illinois employer responded by firing him. Plaintiff sued the defendants – the employer and a company decision maker – for unpaid bonus money under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1, et. seq. (IWPCA) and for other common law claims. Defendants moved to dismiss all claims.

In denying the bulk of the defendants’ motion, the Court discussed the nature and reach of earned bonus liability under the IWPCA in the context of a motion to dismiss.

The IWPCA defines payments as including wages, salaries, earned commissions and earned bonuses pursuant to an employment contract.  820 ILCS 115/12. An earned bonus is defined as “compensation given in addition to the required compensation for services performed.”  Il. Admin. Code, Title 56, s. 300.500.

The IWPCA allows an earned bonus claim only where an employer makes an unequivocal promise; a discretionary or contingent promise isn’t enough.  So as long as the plaintiff alleges both an employer’s unambiguous promise to pay a bonus and the plaintiff’s satisfactory performance of the parties’ agreement, the plaintiff can make out a successful IWPCA claim for an unpaid earned bonus.

Here, the plaintiff sufficiently alleged a meeting of the minds on the bonus issue – the defendant-employer unequivocally promised a $25,000 bonus if plaintiff met a specific sales goal – and that the plaintiff met the goal.

The court then partially granted the employer’s motion to dismiss the plaintiff’s statutory and common law retaliation claims.

IWPCA Section 14(c) prevents an employer from firing an employee in retaliation for the employee lodging a complaint against the employer for unpaid compensation. 820 ILCS 115/14(c).  Since the plaintiff alleged both an agreement for earned bonus payments and that he was fired for requesting payment, this was enough to survive a motion to dismiss.

The court did, however, dismiss plaintiff’s common law retaliatory discharge claim.  To prevail on this claim, a plaintiff must allege (1) he was terminated, (2) in retaliation for plaintiff’s conduct, and (3) the discharge violates a clearly mandated public policy.

The Court rejected the plaintiff’s argument that an IWPCA violation was enough to trigger Illinois public policy concerns. The court held that to invoke the public policy prong of the retaliation tort, the dispute “must strike at the heart of a citizen’s social rights, duties and responsibilities.”  And since the Court viewed an IWPCA money dispute to a private, economic matter between employer and employee, the employer’s alleged IWPCA violation didn’t implicate public policy.

Lastly, the Court denied the defendant’s motion to dismiss plaintiff’s fraud in the inducement claim.  In this count, plaintiff alleged he quit his former Florida job in reliance on factual misstatements made by the defendant about its fiscal health, among other things.

To sufficiently plead fraudulent inducement, a plaintiff must allege (1) a false statement of material fact, (2) known or believed to be false by the person making it, (3) an intent to induce the other party to act, (4) action by the other party in reliance on the truth of the statement, and (5) damage to the plaintiff resulting from the reliance.  To be actionable, a factual statement must involve a past or present fact; expression of opinions, expectations or future contingencies cannot support a fraudulent inducement claim.

Where there is a disparity in knowledge or access to knowledge between  two parties, the fraudulent inducement plaintiff can justifiably rely on a representation of fact even if he could have discovered the information’s falsity upon further investigation.

While the defendant argued that the predicate fraud statements were non-actionable embellishments or puffery, the court disagreed.  It found that plaintiff’s allegations that defendant made factually false statements about the defendant’s financial state and the plaintiff’s job opportunities were specific enough to state a claim.

The court noted that plaintiff alleged the defendants supplied plaintiff with specific financial figures based on historical financial data as part of their pre-hiring pitch to the plaintiff. Taken in totality, the information was specific and current enough to support a fraud claim.

Afterwords:

Earned bonuses are covered by IWPCA; discretionary or conditional bonuses are not;

The common law retaliation tort has teeth. It’s not enough to assert a statutory violation to implicate the public policy element.  A private payment dispute between an employer and employee – even if it involves a statutory violation – won’t rise to the level of a public policy issue;

An employer’s false representations of a company’s financial status can underlie a plaintiff’s fraud claim since financial data supplied to a prospective hire is information an employer should readily have under its control and at its disposal.

Fed. Court ‘Blue Pencils’ Telecom Employer’s Overbroad Nonsolicitation Term – IL ND

In Call One, Inc. v. Anzine, 2018 WL 2735089 (N.D.Ill. 2018), the Northern District of Illinois provides a useful gloss on Illinois restrictive covenant law in the context of a trade secrets action filed by a call center employer against a long-time employee.

The defendant worked for the plaintiff as a sales representative for 15 years. About a decade into her employment tenure, the defendant signed a non-compete agreement which, among other things, prevented her from soliciting plaintiff’s “prospective customers” for a 12-month post-employment period.

After talks for defendant to become an independent distributor of the plaintiff broke down and defendant quit her job, plaintiff sued when it learned defendant altered a Customer Report and e-mailed it to her personal email account. The defendant countersued for a declaration that the non-solicitation clause was overbroad.

Granting summary judgment for the ex-employee on her counterclaim, the Northern District judge set forth applicable Illinois law on restrictive covenants.

  • Restrictive covenants are scrutinized carefully since they are restraints of trade. The key inquiry is whether a given restriction is reasonable and necessary to protect a legitimate business interest of the employer.
  • A post-employment restrictive covenant is reasonable only where (1) it is no greater than necessary for the protection of a legitimate business interest of an employer, (2) does not impose an undue hardship on the employee, and (3) is not injurious to the public.
  • When determining whether an employer has met the legitimate business interest test – prong (1) above – the court considers whether an employer enjoys near-permanent relationships with its customers, whether the employee acquired confidential information during her employment and time and place restrictions contained in the subject covenant.
  • Courts are reluctant to prohibit former employee’s from servicing customers they never had contact with while working for an employer.

Applying these factors, the court found that the non-solicitation term excessive. It specifically viewed the restriction broader than necessary to protect Plaintiff’s ongoing client relationships.

According to the court, to prevent defendant from soliciting anyone who was ever a customer of plaintiff over the past 15 years was facially overbroad and not necessary to protect plaintiff’s current customer relationships. Another reason the court found the non-solicitation provision too expansive was it prevented defendant from contacting plaintiff’s clients with whom she never had any direct contact and didn’t even know about.

The agreement also contained a severability or “blue pencil” provision. Such a provision allows a court to modify an overbroad restrictive covenant in some settings.

Here, because the 12-month non-solicitation provision was chronologically reasonable in scope, the Court reformed the covenant to only prevent defendant from contacting any entity (a) who was a current and prospective customer of plaintiff as of defendant’s January 2018 termination date and (b) for which defendant had responsibility at the time of her separation.

The Court also granted summary judgment for the defendant on plaintiff’s claim premised on the Defend Trade Secrets Act of 2016, the statute that gives a trade secrets plaintiff access to Federal courts. To prove a Federal trade secrets act claim, the plaintiff must establish (a) the existence of a trade secret, and (b) misappropriation.

Misappropriation includes unauthorized disclosure of a trade secret by a person who used improper means to acquire knowledge of the trade secret and unauthorized disclosure of a trade secret by a person who knew or had reason to know that knowledge of the trade secret was “acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret.” 18 U.S.C. ss. 1839(5)(B)(i)-(ii).

Plaintiff failed to adduce evidence that defendant owed a duty to protect the confidentiality of the Customer Report when it was never labelled as confidential.  As a result, no reasonable jury could find defendant acquired the Report through improper means by breaching a duty to maintain its secrecy.

Afterwords:

An employer suing a former employee for violating a restrictive covenant must demonstrate the existence of near-permanent customer relationships or confidential information. As long as the time and space limitation is objectively reasonable, a court can edit and contract the scope of a post-employment restriction.

Where an employer cannot demonstrate that an employee had a duty to maintain the secrecy of the information the employer is trying to protect, it likely can’t establish Federal trade secrets misappropriation.

The plaintiff’s elaborate information security policies worked against it here. By failing to label the subject Report as confidential (which was required per the employee handbook), the Court refused to find the Report sufficiently confidential to impose a duty on the defendant to keep it secret.

Vague Oral Agreement Dooms Mechanics Lien and Home Repair Act Claims – IL First Dist.

The First District recently examined the quantum of proof necessary to prevail on a breach of oral contract and mechanics lien claim and the factors governing a plaintiff’s request to amend its pleading.

In Link Company Group, LLC v. Cortes, 2018 IL App (1st) 171785-U, the Defendant hired the plaintiff – his former son-in-law – to rehab a residence in the Northern suburbs of Chicago. After a dispute over plaintiff’s construction work and billing issues, the plaintiff sued to foreclose a mechanics lien and for breach of contract. The defendant counter-sued and alleged plaintiff violated the Illinois Home Repair and Remodeling Act (IHRRA) requires, among other things, a contractor to provide certain disclosures in writing to a homeowner client. The trial court granted summary judgment for the defendant on plaintiff’s lien and contract claims and denied summary judgment on defendant’s IHRRA counterclaim. All parties appealed.

Affirming, the appeals court first took aim at the plaintiff’s breach of contract and mechanics lien claims.

While oral contracts are generally enforceable, they must contain definite and essential terms agreed to by the parties. For an oral contract to be enforceable, it must be so definite and certain in all respects that the court can determine what the parties agreed to.

Here, the substance of the oral contract was vague. When pressed at his deposition, the plaintiff was unable to articulate the basic terms of the parties’ oral construction contract. Since the court was unable to decipher the key contract terms or divine the parties’ intent, the plaintiff’s breach of contract failed.

The plaintiff’s inability to prove-up its oral contract claim also doomed its mechanics lien action. In Illinois, a valid mechanics lien foreclosure suit requires the contractor to prove an enforceable contract and the contractor’s substantial performance of that contract. Since the plaintiff failed to establish a binding oral contract, by definition, it couldn’t prevail on its mechanics lien claim.

The First District also affirmed the trial court’s denial of the plaintiff’s motion to amend its complaint. While amendments to pleadings are generally liberally allowed in Illinois, a court will not rubber stamp a request to amend. Instead, the court engages in a multi-factored analysis of (1) whether the proposed amendment would cure the defective pleading, (2) whether other parties would sustain prejudice by virtue of the proposed amendment, (3) whether the proposed amendment is timely, and (4) whether previous opportunities to amend the pleadings could be identified.

Here, the plaintiff’s proposed implied-in-fact contract was “nearly identical” to the stricken breach of oral contract claim. An implied-in-fact contract is one where contract terms are implicit from the parties’ conduct. Here, the parties conduct was too attenuated to establish definite contract terms. As a result, the proposed implied-in-law contract claim was facially deficient and didn’t cure the earlier, failed pleading.

Ironically, the plaintiff’s failure to allege an enforceable oral agreement also precluded summary judgment on the defendant’s IHRRA counterclaim. A valid IHRRA claim presupposes the existence of an enforceable contract. Since there was no written agreement and the parties’ oral agreement was unclear, there was no valid contract on which to hook an IHRRA violation.

Afterwords:

This case cements proposition that a valid oral contract claim requires proof of definite and certain terms. A plaintiff’s failure to allege a clear and definite oral agreement will prevent him from asserting either a mechanics lien or Home Repair Act claim based on the putative oral agreement.

Link Company also illustrates the four factors a litigant must satisfy in order to amend a pleading. If the proposed amended complaint fails to allege a colorable cause of action, a court can properly deny leave to amend despite Illinois’ liberal pleading amendments policy.

New Lessor’s Vie for Radio Station Tenant’s Past-Due Rent Squelched – IL First Dist.

Soon after buying the commercial premises, the new landlord in 1002 E. 87th Street, LLC v. Midway Broadcasting Corporation, 2018 IL App (1st) 171691 started giving the radio station static over past-due rent that was owed to the prior landlord.

The defendant’s silence in response spoke volumes and the dispute swelled to an irreconcilable impasse.

The plaintiff sued to recover about $70K in past-due rent. The tenant then turned the tables on the landlord, filing a wave of defenses and counterclaims and a motion to dismiss plaintiff’s suit. The trial court dismissed plaintiff’s suit for lack of standing and plaintiff appealed.

Affirming the trial court, the appeals court examined the doctrine of standing in the context of a Code Section 2-619 motion filed in a lease dispute. The Court amplified its lease law analysis with a recitation of the applicable rules governing attorneys’ fees provisions.

Lack of standing is an affirmative defense under Code Section 2-619(a)(9). Standing requires a plaintiff to have an interest in a given lawsuit and its potential outcome. The defendant claiming a lack of standing has the burden of proving the defense.

Where a landlord conveys property by warranty deed without reserving any rights, it also conveys the property’s leases and the right to receive unaccrued rent. However, the new landlord does not have a right to recover rent that came due before it owned the property. That right remains the original landlord’s. [⁋ 17]

The Court squelched plaintiff’s arguments it was entitled to recover past-due rent owed to the prior landlord.  The court distinguished this case’s underlying facts from a recent case – A.M. Realty Western v. MSMC Realty, LLC, 2012 IL App (1st) 121183 – where a landlord sold a building and was still able to sue for rent that accrued during its tenure as building owner.  Midway Broadcasting’s facts plainly differ since the plaintiff was suing to recover rents that came due before plaintiff became the premises landlord.

Another factor weighing against the plaintiff landlord was Illinois’ venerable body of case law that holds that rent in arrears is not assignable. This is because past-due rent is viewed as a chose in action and not an incident of the real estate that passes from a seller to a buyer. And since there was no evidence in the record establishing that the prior landlord intended to assign its right to collect unpaid rents, plaintiff’s argument that the previous landlord assigned to it the right to collect defendant’s delinquent rent, missed the mark.

In a sort of reverse “you can’t transmit what you haven’t got” maxim, the plaintiff here had no legal basis to assert a past-due rent claim against the tenant since all unpaid rent came due during the prior landlord’s tenure.  Since that former landlord never assigned its right to collect rents, the plaintiff’s claim fell on deaf ears.

Next, the Court affirmed the tenant’s prevailing-party attorneys’ fees award and signaled that to “prevail” in a case, a party must win on a significant issue in the case. Like most leases, the operative one here provided that the winning party could recover its attorneys’ fees.  Illinois follows the American Rule – each side pays its own fees unless there is a contractual fee-shifting provision or an operative statute that gives the prevailing party the right to recover its fees.  Contractual attorneys’ fees provisions are strictly construed and appeals courts rarely overturn fee awards unless the trial court abuses its discretion.

In the context of attorneys’ fees disputes, a litigant is a prevailing party where it is successful on any significant issue in the action and receives a judgment in his/her favor or obtains affirmative recovery.  A litigant can still be a prevailing party even where it does not succeed on all claims in a given lawsuit. Courts can declare that neither side is a prevailing party where each side wins and loses on different claims. However, a “small victory” on a peripheral issue in a case normally won’t confer prevailing party status for purposes of a fee award.  [¶ 36]

The Court rejected the lessor’s claim that it was the prevailing party since the court entered an agreed use and occupancy award.  Use and occupancy awards are usually granted in lease disputes since “a lessee’s obligation to pay rent continues as a matter of law, even though the lessee may ultimately establish a right to *** obtain relief.”  [¶ 32].  Because of the somewhat routine nature of use and occupancy orders, the court declined to find the landlord a prevailing party on this issue.

Afterwords:

I found this case post-worthy since it deals with an issue I see with increasing frequency: what are a successor landlord’s rights to prior accruing rents from a tenant?  In hindsight, precision in lease drafting would be a great equalizer.  However, clear lease language is often absent and it’s left to the litigants and court to try to divine the parties’ intent.

The case and others like it make clear that rents accruing before a landlord purchases a building normally belong the predecessor owner.  Absent an agreement between the former and current lessors or a clear lease provision that expressly provides that a new owner can sue for accrued rents, the new landlord won’t have standing to sue for accrued unpaid rent.

The case also makes it clear that small victories (here, an inconsequential dismissal of one of many counterclaims) in the context of larger lawsuit, won’t translate to prevailing party status for that “winner” and won’t give a hook for attorneys’ fees.

Business Records Evidence – Getting Them In: Reading List 2018

Today’s reading list highlights some recent civil and criminal cases from State and Federal jurisdictions across the country that address the admissibility of business records (with some public records and ‘residual’ rule cases sprinkled in) in diffuse fact settings.

The cases below examine evidentiary issues involving documents that range from the clandestine (top-secret State Department cables) to the pedestrian (credit card records, loan histories, Post-It ® notes) to the morbid (telephone records in a murder case).

The encapsulated rulings below illustrate that courts generally follows the same authenticity and hearsay rules but there is a marked difference in the in the intensity with which some courts put a plaintiff to its proofs. While some courts liberally allow business record evidence so long as there is a modicum of reliability, others more severely scrutinize the evidence admissibility process.

If nothing else, given the recency of these cases (they are all from this year), what follows will hopefully provide litigators a useful starting point for assessing what factors a court looks at when deciding whether business records evidence passes legal admissibility tests.

Records: Excel spreadsheets printed from a third-party’s servers

Type of Case: Fraud

Did They Get In? Yes

Case: U.S.A. v. Channon, 881 F.3d 806 (10th Cir. 2018)

Facts: Government sued defendants who operated a two-year scam where they cashed in OfficeMax rewards accounts to acquire over $100K in merchandise. Government offers OfficeMax spreadsheets authored and kept by an OM vendor into evidence.

Objections: hearsay, improper summaries

Applicable Rules and Holding:

FRE 1006 – a summary of documents are admissible where the underlying documents are voluminous and can’t be conveniently examined in court. Proponent must make original or duplicate available to the other party. Summary’s underlying documents don’t have to be admitted into evidence with the summary/ies but must still be admissible in evidence.

FRE 1001(d) – “original” electronic document means “any printout – or other output readable by sight – if it accurately reflects the information” housed in a host database.

Held: summary spreadsheet deemed an “original” where two witnesses testified the spreadsheets reflected same information in the database. Since government made the spreadsheets available to the defendants before trial, they were admissible.

FRE 801, 803(6): hearsay generally; business records exception

Hearsay presupposes a “statement” by a “declarant.” FRE 801. A declarant must be a human being. The Excel spreadsheets at issue here are computer data and not statements of a live person. The spreadsheets are not hearsay.

Even if the spreadsheets are considered hearsay, they are admissible under the business records exception since plaintiff testified that the records were prepared in normal course of business, made at or near the time of the events depicted, and were transmitted by someone who had a duty to accurately convey the information and where there are other badges of reliability.

Records: Credit card records

Type of Case: Breach of contract

Did They Get In? Yes.

Case: Lewis v. Absolute Resolutions VII, LLC, 2018 WL 3261197 (Tex. App. – SA 2018)

Facts: Plaintiff debt buyer of credit card account sues card holder defendant. After summary judgment for plaintiff, defendant appeals on basis that court credited a defective business records affidavit.

Objection: hearsay, plaintiff wasn’t originator of the records.

Applicable Rules and Holding:

Tex. R. Evid. 803(6) – a business record created by one entity that later becomes another entity’s primary record is admissible as a record of regularly conducted activity.

Personal knowledge by the third party of the procedures used in preparing the original documents is not required where the documents are incorporated into the business of a third party, relied on by that party, and there are other indicators of reliability.

Tex. R. Evid. 902(10) – business records are admissible if accompanied by affidavit that satisfies requirements of Rule 902(10).

To introduce business records created by a third party, the proponent must establish (1) the document is incorporated and kept in course of testifying witness’s business, (2) the business typically relies on accuracy of the contents of the document, and (3) the circumstances otherwise indicate the trustworthiness of the document. Summary judgment for successor card issuer affirmed.

Records: Medical Records, Police Reports

Type of Case: Manslaughter (criminal)

Case: People v. McVey, (2018) 24 Cal.App.5th 405

Did They Get In? No.

Facts: Defendant appeals conviction on manslaughter and vandalism charges based on trial court’s improper exclusion of victim’s medical records and police reports which Defendant believed had exculpatory information.

Objection: hearsay

Applicable Rules and Holding:

Cal. Code s. 1271 – business records hearsay rule.
Hospital records can be admitted as business records if custodian of records or other duly qualified witness provides proper authentication.

Cal. Code ss. 1560-1561 – compliance with subpoena for documents can dispense with need for live witness if records are attested to by custodian of records with a proper affidavit.

Records custodian affidavit must (1) describe mode of preparation of the records, (2) state that affiant is duly authorized custodian of the records and has authority to certify the records, and (3) state the records were prepared in the ordinary course of business at or near the time of the act, condition, or event recorded.

Police reports are generally not reliable enough for face-value admission at trial. While police reports can be kept in regular course of police “business,” they typically are not created to transact business. Instead, police reports are created primarily for later use at trial.

The hallmarks of reliability – contemporaneous creation, necessity of record’s accuracy for core purpose of business – are missing from police reports.

Records: Prior servicers’ mortgage loan records

Type of Case: Breach of contract, mortgage foreclosure

Did They Get In? Yes

Case: Deutsche Bank v. Sheward, 2018 WL 1832302 (Fla. 2018)

Facts: lender receives money judgment against borrower after bench trial. Borrower appeals on ground that loan payment history was inadmissible hearsay

Objection: hearsay – successor business incompetent to testify concerning predecessor’s records

Applicable Rules and Holding: where a business takes custody of and integrates another entity’s records and treats them as its (the integrating business) own, the acquired records are treated as “made” by acquiring business.

A witness can lay foundation for records of another company. There is no requirement that records custodian have personal knowledge of the manner in which prior servicer maintained and created records

A successor business can establish reliability of former business’s records by “independently confirming the accuracy of third-party’s business records.”

Plaintiff’s trial witness adequately described process that successor entity utilized to vet prior servicer documents.

Also, see Jackson v. Household Finance Corp., III, 236 So.3d 1170 (Fla. 2d DCA 2018)(foundation for prior mortgage loan servicer’s records can be laid by certification or affidavit under Rule 902(11))

Records: Third-Party’s vehicle inspection report containing vehicle ownership data

Did They Get In? No

Type of Case: Personal injury

Case: Larios v. Martinez, 239 So.3d 1041 (La. 2018)

Facts: plaintiff sues hit-and-run driver’s insurer under La. direct action statute. Insurer appeals bench trial verdict in favor of plaintiff.

Objection: hearsay

Applicable Rules and Holding:

A witness laying the foundation for admissibility of business records need not have been the preparer of records. Instead, the custodian or qualified witness need only be familiar with record-keeping system of the entity whose records are sought to be introduced.

Plaintiff failed to introduce the report through a qualified witness. Plaintiff had no knowledge of the inspection report company’s record-keeping practices or methods. The trial court errored by allowing the report into evidence.

Judgment for plaintiff affirmed on other grounds.

Records: Student loan records

Type of Case: Breach of contract

Did They Get In? Yes.

Case: National Collegiate Student Loan Trust v. Villalva, 2018 WL 2979358 (Az. 2018)

Facts: assignee of defaulted student loan sues borrower. Borrower defendant appeals bench trial judgment for plaintiff.

Objection: loan records are inadmissible hearsay and lack foundation

Applicable Rules and Holding: witness for an entity that did not create a loan record can still lay foundational predicate by testifying to creator’s transfer of the business record to custodial entity, and the transferee entity’s maintenance of the records and reliance on the record in the ordinary course of business.

Documents prepared solely for litigation are generally not business records. However, where the litigation documents are “mere reproductions” of regularly-kept records, they are admissible as business records to the same extent as the underlying records.

Plaintiff’s witness laid sufficient evidentiary foundation where witness testified that assignor/originator transferred loan documents to assignee/plaintiff, that the plaintiff integrated the records with its own and that plaintiff had historically purchased records from the assignor.

Documents created “with an eye toward litigation” were still admissible since they were culled from pre-existing loan records kept in the regular course of business. Judgment for plaintiff affirmed.

Records: Halfway house incident report

Type of Case: Criminal escape

Did They Get In? No

Case: Wassillie v. State of Alaska, 411 P.3d 595 (Alaska 2018)

Facts: Defendant charged and convicted of second degree escape for leaving halfway house in which he was sentenced to serve remaining prison term.

Objection: Jury considered inadmissible hearsay document – an incident report prepared by halfway house staff member

Applicable Rules and Holding:

Incident report is missing earmarks of trustworthiness and is inadmissible hearsay. An investigative report raises concerns about the report author’s “motivations to misrepresent.” There is potential for animosity between reporter and subject of report which could lead reporter to hide mistakes or “inflate evidence” in order to further the author’s agenda.

Whether a report is deemed to have been prepared in regular course of business involves a multi-factored analysis of (1) the purpose for which the record was prepared, (2) a possible motive to falsify the record, (3) whether the record is to be used in prospective litigation, (4) how routine or non-routine the challenged record is, and (5) how much reliance the business places on the record for business purposes.

Examples of documents found to be sufficiently routine under Alaska law to merit business records treatment include payroll records , bills of lading, account statements, and social security records are typically admissible as business records.

However, a more subjective document – like a police report or the incident report here – is too susceptible to author’s selective memory and subconscious bias. Conviction reversed.

Records: Cell phone records

Type of Case: Murder

Did They Get In? No.

Case: Baker v. Commonwealth of Kentucky, 545 S.W.3d 267 (Ky 2018)

Facts: Defendant convicted of murder. Prosecution relied in part on victim’s cell phone records to tie defendant to victim.

Objection: cell phone records were inadmissible hearsay

Applicable Rules and Holding: prosecution must establish that phone logs are (a) authentic and (b) non-hearsay (or subject to a hearsay exception). Kentucky Evidence Rule 901(b) provides that evidence can be authenticated via witness testimony from a qualified witness. Here, prosecution witness – a detective – established that phone records were authentic: they were what they purported to be.

Once the authenticity hurdle was cleared, prosecution had to defeat hearsay objection. While the call logs constituted regularly conducted activity under KRE 803(6), the prosecution didn’t offer the logs through a custodian or by way of a Rule 902(11) affidavit. As a result, the trial court erred by admitting the call logs.

Note: the admission of the hearsay call logs was “harmless” since there was copious other testimonial and documentary evidence of defendant’s guilt. Conviction affirmed.

Records: Home health nurse’s “sticky” note

Type of Case: Medical malpractice

Did It Get In? Yes.

Case: Arnold v. Grigsby, 417 P.3d 606 (Utah 2018)

Facts: Patient sues doctor and others for malpractice after colonoscopy goes bad. (Ouch.) Nurse and pharmacy employee’s handwritten note on post-it/sticky note on plaintiff’s medical chart introduced to show plaintiff’s knowledge of injury within two years of surgery. Post-it notes contents was basis for Defendant’s statute of limitations defense and jury’s ‘not guilty’ verdict.

Objection: sticky note has multiple levels of hearsay and is inadmissible.

Applicable Rules and Holding: hearsay within hearsay is not excluded where each part of combined statements meets exception to rule of exclusion.

Sticky note is classic hearsay: it is being offered to prove truth of matter asserted – that plaintiff had contacted an attorney within days of the surgery. Utah R. Evid. 801(c)(hearsay generally).

The court found the note admissible under Rule 803(6) business records exception as the note is a record of the pharmacy’s regularly conducted activity and was entered contemporaneously into plaintiff’s electronic medical records.

Note’s statement that “client has been told by her lawyer not to sign any papers indicating she’ll pay” is admissible under Rule 803(3) – the hearsay exception for out of court statements that show a declarant’s state of mind (i.e. his motive, intent, plan, etc.).

Jury verdict for doctor defendants affirmed.

Records: Government reports; state department cables

Type of Case: Statutory claim under Torture Victim Protection Act (TVPA) (filed by relatives of victims killed by Bolivian Gov”t)

Did They Get In? Yes and No.

Case: Mamani v. Berzain, 2018 WL 2013600 (S.D. Fla 2018)

Facts: relatives of victims killed during civil unrest in Bolivia sued country’s former president and minister of defense under TVPA which allows plaintiffs to sue foreign officials in U.S. courts for torture and killing of a plaintiff’s relatives. Defendants’ motion for summary judgment denied.

Objection: various governmental documents are inadmissible hearsay or unauthenticated.

Applicable Rules and Holding: Public records hearsay exception – FRE 803(8) – and “residual” hearsay exception. FRE 803(7).

The public records hearsay exception applies where (1) the record sets forth the office’s activities, (2) the record concerns a matter observed by someone with a legal duty to report it – but not including a matter observed by law enforcement personnel in a criminal case, or (3) in a civil case or against the government in a criminal case, the record consists of factual findings from a legally authorized investigation.

The party opposing admission of the public record must show the source of or circumstances generating the information lacks basic levels of reliability.

Here, an investigatory report prepared by three prosecutors fit the definition of a record of a public office prepared in conjunction with an authorized investigation.

Under the “residual” hearsay exception, a statement is not excluded if it (1) has equivalent circumstantial guarantees of trustworthiness, (2) is offered as evidence of a material fact, (3) is more probative on the point for which it is offered than any other evidence the proponent can obtain through reasonable efforts, and (4) admitting it (the statement) will serve the purposes of these rules and interests of justice. FRE 807(a).

The residual hearsay exception is sparingly used and applies only where exceptional guarantees of trustworthiness are present coupled with elevated levels of probativeness and necessity.

Here, military and police records lack indicia of trustworthiness in light of the volatile atmosphere in which the reports were made. And while challenged state department cables do have exceptional guaranties of trustworthiness as they were signed by the then-U.S. Ambassador to Bolivia, the defendants failed to establish that the cables were more probative on the point for which they were offered than any other evidence the defendants could have obtained through reasonable efforts.

Records: Accident report

Type of Case: Personal injury

Did It Get In? No.

Case: 76th and Broadway v. Consolidated Edison, 160 A.D.3d 447 (NY 2018)

Facts: plaintiff injured on construction site sues general contractor and owner for negligence. Appeals court reverses trial court and grants summary judgment for defendant.

Objection: accident report offered by plaintiff that stated platform “must have been moved during demolition or trench work by [defendant contractor] is inadmissible.

Applicable Rules and Holding: voluntary statements in accident report authored by someone who is not under a duty to prepare the report is inadmissible hearsay. The report was based on information supplied by unnamed third parties. Because of its speculative nature, the report is inadmissible to create genuine issue of material fact.

Records: Credit card records

Type of Case: Breach of contract

Did They Get In? Yes.

Case: Lewis v. Absolute Resolutions VII, LLC, 2018 WL 3261197 (Tx. App. – SA 2018)

Facts: plaintiff assignee of credit card debt sues to collect. Summary judgment for assignee plaintiff affirmed.

Objection: plaintiff failed to lay proper foundation for original credit card issuer’s (Citibank) business records.

Applicable Rules and Holding: Business records are admissible if accompanied by Rule 902(10) affidavit. A business record created by one entity that later becomes another entity’s primary record is admissible as record of regularly conducted activity. Rule 803(6).

A third party’s (e.g. an assignee, successor, account buyer, etc.) personal knowledge of the specific procedures used by the record creator is not required where the third party incorporates the documents into its own business and regularly relies on the records.

To introduce business records created by a third party predecessor or assignee, the proponent must establish (1) the document is incorporated and kept in the course of the offering party’s business, (2) the business typically relies on the accuracy of the contents of the document, and (3) the circumstances otherwise indicate trustworthiness of the document.

The plaintiff’s Rule 902(10) affidavit explained the manner and circumstances in which plaintiff acquired the defendant’s credit card account and further stated that the plaintiff regularly relies on and incorporates other debt sellers’ business records.

The court was especially swayed by the testimony that the assignor was under a duty to convey accurate information to the plaintiff and risked civil and criminal penalties for providing false information. According to the court, this last factor gave the records an extra layer of protection against falsification.

Contractor ‘Extras’ Claims Versus Quantum Meruit: A Fine-Line Distinction? (IL Case Summary)

Twin contract law axioms include (1) a quasi-contract claim (i.e. quantum meruit) cannot co-exist with one for breach of express contract, and (2) to recover for contract “extras” or out-of-scope work, a plaintiff must show the extra work was necessary through no fault of its own.  While easily parroted, the two principles can prove difficult in their application.

Archon v. U.S. Shelter, 2017 IL App (1st) 153409 tries to reconcile the difference between work that gives rise to quantum meruit recovery and work that falls within an express contract’s general subject matter and defeats a quantum meruit claim.

The subcontractor plaintiff installed a sewer system for a general contractor hired by a city.  The subcontract gave the City final approval of the finished sewer system.  City approval was a condition to payment to the plaintiff.  The subcontract also provided that extra work caused by the plaintiff’s deficiencies had to be done at plaintiff’s expense.

The subcontractor sued the general contractor to recover about $250K worth of repair work required by the City.  The trial court granted summary judgment for the general contractor on both plaintiff’s quantum meruit and extras claim.  On remand from an earlier appeal, the plaintiff dropped its extras claim and went forward solely on its quantum meruit claim.  The trial court again found for the general and the sub appealed.

Result: Summary judgment for general contractor affirmed.  Plaintiff’s quantum meruit claim fails as a matter of law.

Reasons:

To recover for quantum meruit (sometimes referred to as quasi-contract or implied contract), the plaintiff must prove (1) it performed a service to benefit a defendant, (2) it did not perform the service gratuitously, (3) defendant accepted the benefits of plaintiff’s services, and (4) no contract existed to prescribe payment for the service.

A quantum meruit claim cannot co-exist with a breach of express contract one: they are mutually exclusive.

Parties to a contract assume certain risks.  Sometimes, when they realize their contractual expectations aren’t going to be realized, they resort to quantum meruit recovery as a desperation maneuver.  The law doesn’t allow this.  “Quasi-contract is not a means for shifting a risk one has assumed under the contract.” (¶ 34)(citing Industrial Lift Truck Service Corp. v. Mitsubishi International Corp., 104 Ill.App.3d 357).

A contractor’s claim for ‘extras’ requires the contractor to prove that (1) the work for which it seeks compensation was outside the scope of a contract, and (2) the extra work wasn’t caused by the contractor’s fault.  

In a prior appeal, the Court found that it wasn’t clear whether the extra work was the result of the plaintiff contractor’s mistake.  As a result, the contractor made a strategic decision to abandon its extras claim and instead proceeded on its quantum meruit suit.

At first blush, an extras claim mirrors quantum meruit’s requirement of work that’s not tied to any express contract term.

However, as the Court emphasized, there’s a definite legal difference between a claim for extra work and one for quantum meruit.  “A claim for quantum meruit lies when the work the plaintiff performed [is] wholly beyond the subject matter of the contract that existed between the parties.” [¶ 39]

The key question is whether an express contract covers the same general subject matter as the challenged work.  If it does, there can be no quantum meruit recovery as a matter of law.  [¶ 45]

Applying these principles, the Court found that the work for which plaintiff sought to recover in quantum meruit – sewer pipe repairs and replacement – involved the same sewer system involved in the underlying express contract.  As a result, plaintiff’s quantum meruit claim failed.

Take-aways:

This case provides an interesting illustration of the fine-line distinction between a contractor’s action to recover for extra, out-of-scope work and services that merit quantum meruit recovery.

Contractors should take pains to make it clear in the contract that if they do perform extra work, there is a mechanism in place (i.e. time and materials terms) that quantifies the extras.  Since the sewer repair work fell within the general subject matter of the underlying sewer installation contract, it was easy for the Court to find that the express contract encompassed the plaintiff’s work and reject the quantum meruit claim.

In hindsight, the plaintiff should have pressed forward with its breach of express contract claim premised on the extra work it claimed it performed.

Judgment Creditor and Debtor’s Lawyers Duke It Out Over Equity in Home – ND IL

A law firm’s failure to scrutinize its client’s transfer of property to a land trust backfired in Radiance v. Accurate Steel, 2018 WL 1394036.

The case presents a priority fight between the plaintiff judgment creditor and the law firm who defended the debtor in post-judgment proceedings.

The Relevant Chronology

August 2013 – Defendant debtor transferred the Property to an irrevocable trust;

March 2014 – Plaintiff’s predecessor recorded its money judgment against defendant;

June 2014 – The law firm agrees to represent defendant if she mortgaged the Property to secure payment of attorney fees.

June 2015 – The law firm records a mortgage against the Property;

March 2018 – The court voids the 2013 transfer of the Property into a land trust as a fraudulent transfer.

The Trial Court’s Decision

The court ruled that the Property reverted back to the debtor and was no longer protected from its creditors. The court also found the law firm lacked actual or constructive notice that the creditor’s prior judgment lien could wipe out the firm’s mortgage.

As a result, the Court found the law firm met the criteria for a bona fide purchaser – someone who gives value for something without notice of a competing claimant’s right to the same property.

Reversing itself on plaintiff’s motion to reconsider, the Court first noted that recording a judgment gives the creditor a lien on all real estate owned in a given county by a debtor. 735 ILCS 5/12-101.

Illinois follows the venerable “first-in-time, first-in-right” rule which confers priority status on the party who first records its lien.  An exception to the first-in-time priority rule is where a competing claimant is a bona fide purchaser (BFP). A BFP is someone who provides value for something without notice of a prior lien on it.

Here, the law firm unquestionably provided value – legal services – and lacked notice of the bank’s judgment lien since at the time the firm recorded its mortgage, the title to the real estate was held in trust. Where a creditor records a judgment against property held in a land trust, the judgment is not a lien on the real estate. Instead, it only liens the debtor’s beneficial interest in the trust. (See here  and here.) These factors led the Court originally to find that the Firm met the BFP test under the law.

Reversing itself, the Court found the law firm was on inquiry notice that it’s mortgage could be trumped by the plaintiff’s judgment lien.

Inquiry notice means “facts or circumstances are present that create doubt, raise suspicions, or engender uncertainty about the true state of title to real estate.” In re Thorpe, 546 B.R. 172, 185 (Bankr. C.D. Ill. 2016)(citing Illinois state court case authorities).

A mortgagee has a responsibility not only to check for prior liens and encumbrances in the chain-of-title, but also to consider “circumstances reasonably engendering suspicions as to title.” Id.

In its reconsideration order, the Court noted as badges of fraud the plaintiff’s recording its judgment lien more than a year before the law firm’s mortgage and the ample proof of the debtor’s pre-transfer financial struggles.

The Court found the law firm was apprised of facts – namely, debtor’s financial problems, aggressive creditors, and gratuitous transfer of the Property into a land trust – that obligated it to dig deeper into the circumstances surrounding the transfer.

Afterwords:

Radiance and the various briefing that culminated in the Court’s reconsideration order provide an interesting discussion of creditor priority rules, law firm retainer agreements, trust law fundamentals and fraudulent transfer basics, all in a complex fact pattern.

The case reaffirms the proposition that where property is held in trust, a judgment lien against a trust beneficiary will not trump a later recorded judgment against the trust property.

However, where real estate is fraudulently transferred – either intentionally or constructively (no value is received, transferor incurs debts beyond her ability to pay, e.g.) – a creditor of the transferee should think twice before it transacts business with a debtor and delve deeper into whether a given property transfer is legitimate.

 

 

IL Supreme Court Expands on Shareholder Derivative Suits and Standing Doctrine in Att”y Malpractice Suit

Some minority shareholders in an LLC sued their former counsel for legal malpractice alleging the firm failed to file “obvious” breach of fiduciary claims against the LLC’s corporate counsel.

Affirming summary judgment for the defendant law firm in Stevens v. McGuirreWoods, LLP, 2015 IL 118652, the Illinois Supreme Court gives content to the quantum of proof needed to sustain a legal malpractice claim and discusses the type of legal interest that will confer legal standing for a corporate shareholder to sue in its individual capacity.

The plaintiffs’ central claim was that McGuirreWoods (MW) botched the underlying case by not timely suing Sidley Austin, LLP (Sidley), the LLC’s erstwhile counsel, in the wake of the LLC’s majority shareholders looting the company.  Sidley got the underlying case tossed on statute of limitations grounds and because the plaintiffs lacked standing.

The trial court found that even if MW had timely sued Sidley, the shareholder plaintiffs still lacked standing as their claims belonged exclusively to the LLC. After the First District appeals court partially reversed on a procedural issue, MW appealed to the Illinois Supreme Court.

Affirming judgment for Sidley, the Illinois Supreme Court considered the interplay between legal malpractice cases and shareholder derivative suits.

Dubbed a “case-within-a-case,” the legal malpractice claim plaintiff alleges that if it wasn’t for an attorney’s negligence in an underlying case, the plaintiff would have won that case and been awarded money damages.

The legal malpractice plaintiff must prove (1) the defendant attorney owed the plaintiff a duty of care arising from the attorney-client relationship, (2) the defendant attorney (or law firm) breached that duty, and (3) as a direct and proximate result of the breach, the plaintiff suffered injury.

Injury in the legal malpractice setting means the plaintiff suffered a loss which entitles him to money damages.  Without proof the plaintiff sustained a monetary loss as a result of the lawyer’s negligence, the legal malpractice suit fails.

The plaintiff must establish it would have won the underlying lawsuit but for the lawyer’s negligence.  The plaintiff’s recoverable damages in the legal malpractice case are the damages it would have recovered in the underlying case. [¶ 12]

Here, the plaintiffs sued as individual shareholders.  The problem was that Sidley’s obligation ran to the LLC entity.  As a result, the plaintiffs lacked individual standing to sue Sidley.

Under the law, derivative claims belong solely to a corporation on whose behalf the derivative suit is brought.  A plaintiff must have been a shareholder at the time of the transaction of which he complains and must maintain his shareholder status throughout the entire lawsuit.  [¶ 23]

Illinois’ LLC Act codifies this rule by providing that any derivative action recovery goes to the LLC; not the individual shareholder.  The individual shareholder plaintiff can recover his attorneys’ fees and expenses.  805 ILCS 180/40-15.

While a successful derivative suit plaintiff can benefit indirectly from an increase in share value, the Court held that missing out on increased share value was not something the shareholders could sue for individually in a legal malpractice suit.

Had MW timely sued Sidley, any recovery would have gone to the LLC, not to the plaintiffs.  And since the plaintiffs could not have recovered money damages against Sidley in the earlier lawsuit, they could not recover them in a later malpractice case.

Afterwords:

This case provides a thorough explication of the standing doctrine in the context of shareholder derivative suits.

The case turned on the nature of the plaintiff’s claims.  Clearly, they were suing derivatively (as opposed to individually) to “champion” the LLC’s rights.  As a result, any recovery in the case against Sidley would flow to the LLC – the entity of which plaintiffs were no longer members.

And while the plaintiffs did maintain their shareholder status for the duration of the underlying Sidley case, their decision to terminate their LLC membership interests before suing MW proved fatal to their legal malpractice claims.

 

Zillow ‘Zestimates’ Not Actionable Value Statements; Homeowner Plaintiffs’ Not Consumers Under IL Consumer Fraud Act – IL ND 2018

Decrying the defendants’ use of “suspect marketing gimmicks” that generate “confusion in the marketplace,” the class action plaintiffs’ allegations in Patel v. Zillow, Inc. didn’t go far enough to survive a Rule 12(b)(6) motion.

The Northern District of Illinois recently dismissed the real estate owning plaintiffs’ claims against the defendants, whose Zillow.com website is a popular online destination for property buyers, sellers, lenders and brokers.

The plaintiffs alleged Zillow violated Illinois’s deceptive trade practices and consumer fraud statutes by luring prospects to the site based on fabricated property valuation data, employing “bait and switch” sales tactics and false advertising and giving preferential treatment to brokers and lenders who pay advertising dollars to Zillow.

Plaintiffs took special aim at Zillow’s “Seller Boost” program – through which Zillow provides choice broker leads in exchange for ad dollars – and “Zestimate,” Zillow’s property valuation tool that is based on computer algorithms.

The Court first dismissed Plaintiffs’ Illinois Deceptive Trade Practices Act (IDTPA) claim (815 ILCS 510/1 et seq.). Plaintiffs alleged Zestimate was a “suspect marketing gimmick” designed to lure visitors to Zillow in an effort to increase ad revenue from real estate brokers and lenders, and perpetuated marketplace confusion and disparaged properties by refusing to take down Zestimates that were proven inaccurate. Plaintiffs also alleged Defendants advertise properties for sale they have no intention of actually selling.

The Court found that Zestimates are not false or misleading representations of fact likely to confuse consumers. They are simply estimates of a property’s market value. As Zillow’s disclaimer-laden site says, Zestimates are but “starting points” of a property’s value and no proxy for a professional appraisal. As a result, the Court found Zestimates were nonactionable opinions of value.
Plaintiffs’ allegation that Zestimate creates consumer confusion also fell short. An actionable IDTPA claim premised on likelihood of confusion means a defendant’s use of a given trade name, trademark or other distinctive symbol is likely to mislead consumers as to the source of an advertised product or service. Here, the plaintiffs’ allegations that Zestimate was falsely vaunted as a legitimate valuation tool did not assert confusion between Zillow’s and another’s products or services.

Plaintiffs’ “bait and switch” and commercial disparagement claims fared no better. A bait and switch claim asserts that at a seller advertised one product or service only to “switch” a customer to another, costlier one. A commercial disparagement claim, based on IDPTA Section 510/2(a)(8) prevents a defendant from denigrating the quality of a business’s goods and services through false or misleading statements of fact.

Since plaintiffs did not allege Zillow was enticing consumers with one product or service while later trying to hawk a more expensive item, the bait and switch IDTPA claim failed. The court dismissed the commercial disparagement claim since Zestimates are only opinions of value and not factual statements.

The Court next nixed Plaintiffs’ self-dealing claim: that Zillow secretly tried to enrich itself by funneling For Sale By Owner (FSBO) sellers to premier brokers. While Illinois does recognize that a real estate broker owes a duty of good faith when dealing with buyers, the Court noted that Zillow is not a real estate broker. As a result, Defendants owed plaintiffs no legal duty to abstain from self-dealing.

The glaring absence of likely future harm also doomed the plaintiffs’ IDTPA claim. (The likelihood of future consumer harm is an element of liability under the IDTPA.) The Court found that even if Plaintiffs were confused or misled by Zillow in the past, there was no risk of future confusion. In IDTPA consumer cases, once a plaintiff is aware of potentially deceptive marketing, he can simply refrain from purchasing the offending product or service.

Next, the court jettisoned plaintiffs’ consumer fraud claims which alleged Zestimates impeded homeowners efforts to sell their properties. A business (or another non-consumer) can still sue under ICFA where alleges a nexus between a defendant’s conduct and consumer harm. To meet this consumer nexus test, a corporate plaintiff must plead conduct involving trade practices addressed to the market generally or that otherwise implicates consumer protection concerns. If a non-consumer plaintiff cannot allege how defendant’s actions impact consumers other than the plaintiff, the ICFA claim fails.

The plaintiffs’ consumer fraud allegations missed the mark because plaintiffs were real estate sellers, not buyers. Moreover, the Court found that plaintiffs’ requested relief would not serve the interests of consumers since the claimed actual damages were unique to plaintiffs. The plaintiffs attempt to recover costs incidental to their inability to sell their homes, including mortgage payments, taxes, home owner association costs, utilities, and the like were not shared by the wider consumer marketplace. (For example, the Court noted that plaintiffs did not allege prospective consumer buyers will have to pay incidental out-of-pocket expenses related to Zillow’s Zestimate published values.)

Lastly, the Court dismissed plaintiffs’ deceptive practices portion of their ICFA claim. To state such a claim, the plaintiff must allege he suffered actual damages proximately caused by a defendant’s deception. But where a plaintiff isn’t actually deceived, it can’t allege a deceptive practice.

Here, in addition to falling short on the consumer nexus test, plaintiffs could not allege Zillow’s site content deceived them. This is because under Illinois fraud principles, a plaintiff who “knows the truth” can’t make out a valid ICFA deceptive practice claim. In their complaint, the plaintiffs’ plainly alleged they were aware of Zillow’s challenged tactics. Because of this, plaintiffs were unable to establish Zillow as the proximate cause of plaintiffs’ injury.

Afterwords:

Zillow provides a good primer on Federal court pleading standards in the post-Twombly era and gives a nice gloss on the requisite pleading elements required to state a viable cause of action for injunctive and monetary relief under Illinois’s deceptive practices and consumer fraud statutes.

LLC Stopped From Selling Member’s Residence In Violation of Prior Charging Order – Utah Federal Court

Q: Can A Court Stop An LLC That Pays the Monthly Mortgage of One of Its Members From Selling that Member’s Home Where A Charging Order Has Issued Against the LLC to Enforce a Money Judgment Against the LLC Member?

A: Yes.

Q2: How So?

A2: By selling the member’s property and paying off the member’s mortgage with the sale proceeds, the LLC is effectively “paying the member” to the exclusion of the plaintiff judgment creditor.

Source: Earthgrains Baking Companies, Inc. v. Sycamore Family Bakery, Inc., et al, USDC Utah 2015 (https://casetext.com/case/earthgrains-baking-cos-v-sycamore-family-bakery-inc-3)

In this case, the plaintiff won a multi-million dollar money judgment against a corporate and individual defendant in a trademark dispute.  The plaintiff then secured a charging order against a LLC of which the individual defendant was a 48% member.  When the LLC failed to respond to the charging order, the plaintiff moved for an order of contempt against the LLC and sought to stop the LLC from selling the defendant’s home.

The court granted the contempt motion.  First, the court found that it had jurisdiction over the LLC.  The LLC argued that Utah lacked jurisdiction over it since the LLC was formed in Nevada.  The LLC claimed that under the “internal affairs” doctrine, the state of the LLC’s formation – Nevada – governs legal matters concerning the LLC.

Disagreeing, the court noted that a LLC’s internal affairs are limited only to “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”  The internal affairs doctrine does not apply to claims of third party creditors.  Here, since the plaintiff was a creditor of the LLC’s member, this was not a dispute between LLC and member.  As a result, the internal affairs rule didn’t apply and the Utah court had jurisdiction over the LLC since a LLC member lived in Utah.  (See Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998)).

The Charging Order required the LLC to pay any distribution that would normally go to the member directly to the plaintiff until the money judgment was satisfied.  The Charging Order specifically mentions transfers characterized or designated as payment for defendant’s “loans,” among other things.

The LLC was making monthly mortgage payments on the member’s home and listed the home for sale in the amount of $4M.  Plaintiff wanted to prevent the sale since there was a prior $2M mortgage on the home.

In blocking the sale, the court found that if the LLC sold the member’s home and paid off the member’s mortgage lender with the proceeds, this would violate the Charging Order since it would constitute an indirect payment to the member.  The court deemed any payoff of the member’s mortgage a “distribution” (a direct or indirect transfer of money or property from LLC to member) under the Utah’s LLC Act. (Utah Code Ann. § 48-2c-102(5)(a)).

Since the Charging Order provided that any loan payments involving the member were to be paid to the plaintiff until the judgment is satisfied, the court found that to allow the LLC to sell the property and disburse the proceeds to a third party (the lender) would harm the plaintiff in its ability to satisfy the judgment.

Afterwords:

An interesting case that discusses the intricacies of charging orders and the thorny questions that arise when trying to figure out where to sue an LLC that has contacts in several states.  The case portrays a court willing to give an expansive interpretation of what constitutes an indirect distribution from an LLC to its member. 

Earthgrains also reflects a court endeavoring to protect a creditor’s judgment rights where an LLC and its member appear to be engaging in misdirection (if not outright deception) in order to elude the creditor.

[A special thanks to attorney and Forbes contributor Jay Adkisson for alerting me to this case (http://www.forbes.com/sites/jayadkisson/)]

 

Florida Series: Charging Order that Gives Receiver Management Control over LLC Finances Too Broad – Fla Appeals Court

A creditor’s exclusive remedy against a debtor who is a member or manager of a limited liability company (LLC) is a charging order on the debtor’s distributional interest.

McClandon v. Dakem & Associates, LLC, (see here), a recent Florida appellate case, illustrates that while the charging order remedy is flexible enough to allow for some creative lawyering, it still has limits.

McClandon’s facts are straightforward: the plaintiff obtained a money judgment against an individual who had an interest in several limited liability companies.   In post-judgment proceedings, the plaintiff sought a charging order against the debtor’s LLC interests.  The court granted the charging order and appointed a receiver to take control of the LLCs’ finances.

The debtor appealed.

Partially reversing the charging order’s terms, the appeals court found the trial court exceeded its authority and encroached on the legislature by giving the receiver managerial control over the LLCs.

Section 605.0503 of the Florida LLC statute permits a court to enter a charging order as a creditor’s exclusive remedy to attach a debtor’s interest in a multi-member LLC.  The statute further provides that a court can apply broad equitable principles (i.e., alter ego, equitable lien, constructive trust, etc.) when it fashions a charging order.  Florida’s LLC act is based on the Revised Uniform Limited Liability Company Act of 2006 which specifically provides that a court can appoint a receiver to assist in collection of a debtor’s LLC distributions.  See RULLCA Section 503(b)(1).

The court had discretion to appoint a receiver to help the creditor foreclose on the charging order against the debtor’s LLC interests.  But the court exceeded its boundaries by giving the Receiver expansive management authority over the LLC’s finances.

Since there was no statutory predicate for the court to allow the Receiver to exert managerial control over the LLCs, the trial court’s charging order was overly broad.

Afterwords:

The charging order remedy lends itself to flexibility and creative lawyering.  While a creditor can have a receiver appointed to assist in collecting LLC distributions, the receiver cannot – at least in Florida and other states following the Uniform LLC Act – exert control over the LLC’s financial inner workings.  When petitioning for a receiver, creditor’s counsel should make sure the receiver does not engage in the management of the LLC’s business operations.

 

Landlord’s Double-Rent Holdover Claim Barred by Res Judicata – A Deep Cut (IL 2012)

A commercial lease dispute sets the backdrop for an appeals court’s nuanced discussion of statutory holdover damages and when res judicata and claim-splitting defeat a second lawsuit involving similar facts to and subject matter of an earlier case.

For many years, the tenant in Degrazia v. Levato operated “Jimbo’s” – a sports bar set in the shadow of U.S. Cellular Field (nka Guaranteed Rate Field) and perennial favorite watering hole for Chicago White Sox fans.

Lawsuit 1 – the 2006 Eviction Case

In 2006, plaintiff filed an eviction lawsuit when the lease expired and defendants refused to leave.  In addition to possession of the premises, the plaintiffs also sought to recover use and occupancy damages equal to double the monthly rent due under the lease through the eviction date.

The trial court granted plaintiff’s summary judgment motion in the 2006 eviction suit and struck defendant’s affirmative defense that plaintiff went back on an oral promise to renew the lease.  Defendant appealed and the trial court’s eviction order was affirmed.

Lawsuit 2 – the 2007 Damages Case

Plaintiffs filed a second lawsuit in 2007; this time for breach of lease.  In this second action, plaintiffs sought to recover statutory holdover damages under Section 9-202 of the Forcible Entry and Detainer Act (the “FED Act”).  The court granted defendant’s summary judgment motion on the basis that plaintiff’s second lawsuit was barred by res judicata and the policy against claim-splitting.  The plaintiffs appealed.

Rules and Reasoning

For res judicata to foreclose a second lawsuit, three elements must be present:  (1) a final judgment on the merits rendered by a court of competent jurisdiction; (2) an identity of
causes of action; and (3) an identity of the parties or their privies.

Illinois courts also hew to the rule against splitting claims or causes of action. Under the claim-splitting rule, where a cause of action is entire and indivisible, a plaintiff cannot divide it by bringing separate lawsuits.  A plaintiff cannot sue for part of a claim in one action and then sue for the rest of the claim in a second suit.  Like res judicata, the claim-splitting rule aims to foster finality and protect litigants from multiple lawsuits.

The First District held that the trial court’s order in the 2006 lawsuit granting plaintiffs’ motion for summary judgment was a final order only on the issue of possession but not on plaintiff’s attorneys’ fees since the court expressly granted plaintiffs leave to file a fee petition.  And since there was no final order entered on plaintiff’s attorneys’ fees in the 2006 case, plaintiffs could seek the same fees in the 2007 lawsuit.

The Court did, however, affirm summary judgment for the tenants on plaintiffs’ statutory holdover claim.  FED Act Section 9-202 provides that a tenant who willfully holds over after a lease expires is liable for double rent. 735 ILCS 5/9-202.

The Plaintiffs sought the same double rent in both the 2006 (eviction) and 2007 (damages) lawsuit and requested these damages in their summary judgment motion filed in the 2006 case.  The eviction judge in that 2006 case only allowed plaintiffs to recover statutory use and occupancy instead of statutory holdover rent.  The First District held that the use and occupancy order was final.  And since plaintiffs never appealed or challenged the use and occupancy order in the 2006 case, plaintiff’s 2007 Lawsuit was defeated by res judicata.

The Court also rejected plaintiffs’ argument that the forcible court (in the 2006 Lawsuit) was limited to ordering possession and unable to award statutory holdover damages.  It found that FED Act Section 9-106 expressly allows a landlord to join a rent claim and FED Sections 9-201 and 9-202 respectively allow a plaintiff to recover use and occupancy and holdover damages.  As a result, the First District found there was nothing that prevented the 2006 eviction case judge from awarding holdover rent if plaintiffs were able to show that defendants willfully held over after the lease expired.

Afterwords:

There is scant case law on Illinois’ holdover statute.  While an action for possession under the FED Act is, in theory, a limited, summary proceeding directed solely to the question of possession, the FED Act sections that allow a plaintiff to join a rent claim, to recover use and occupancy payments in addition to double holdover rent give shrewd lessee lawyer’s enough of an opening to argue issue or claim preclusion.

This case demonstrates that the best pleadings practice is for the landlord to join its double-rent claims in the eviction case and put the burden on the tenant to argue the holdover damages claim is beyond the scope of a FED action.  Otherwise, there is a real risk that the failure to join a holdover claim in the possession action will prevent holdover damages in a later lawsuit.

ReMax Franchisor Defeats Tortious Interference Claim With Privilege Defense – IL 4th Dist.

The plaintiffs in Byram v. Danner, 2018 IL App (4th) 170058-U, sued after their planned purchase of a Remax real estate franchise imploded.  The plaintiffs missed an installment payment and the defendants responded by cancelling the agreement. Plaintiffs then filed a flurry of tort claims including fraud and tortious interference with contract.

Plaintiffs’ fraud count alleged the defendants lacked Remax authority to sell the franchise and hid this fact from the plaintiffs. The tortious interference claim asserted defendants bad-mouthed plaintiffs to certain agents, causing them to disassociate from plaintiffs.

The plaintiffs sought to recover their franchise fee, their first installment payment and unpaid commissions earned over a 16-month period. The trial court dismissed all of plaintiffs’ claims under Code Sections 2-615 and 2-619.  Plaintiffs appealed.

In finding the trial court properly jettisoned the fraud claim, the court noted that a valid cause of action for fraud requires (1) a false representation of material fact, (2) by a party who knows or believes it to be false, (3) with the intent to induce the plaintiff to act, (4) action by the plaintiff in reliance on the statement, and (5) injury to the plaintiff as a consequence of the reliance.

However, where a contractual provision negates one of the fraud elements, the fraud claim fails. Here, the underlying contract expressly conditioned defendants’ sale of the franchise on Remax accepting plaintiffs as a franchisee. This qualified language precluded plaintiffs from alleging that defendants misrepresented that they had authority from Remax to sell their franchise. (⁋ 43)

The appeals court also affirmed the trial court’s dismissal of plaintiffs’ tortious interference with prospective economic advantage claim.  To prevail on this theory, a plaintiff must plead and prove (1) his reasonable expectation of entering into a valid business relationship, (2) the defendant’s knowledge of the plaintiff’s expectancy, (3) purposeful interference by defendant that prevents plaintiff’s legitimate expectation from coming to fruition, and (4) damages to the plaintiff.

The ‘purposeful interference’ prong of the tort requires a showing of more than interference.  The plaintiff must also prove a defendant’s improper conduct done primarily to injure the plaintiff.  Where a defendant acts to protect or enhance his own business interests, he is privileged to act in a way that may collaterally harm another’s business expectancy.  Where a defendant invokes a privilege to interfere with a plaintiff’s business expectancy, the burden shifts to the plaintiff to show that the defendant’s conduct was unjustified or malicious.  (¶ 46)

The Court found defendants’ actions were done to protect the future success of their real estate franchise and listings.  Since plaintiffs failed to plead any specific facts showing defendants’ intent to financially harm the plaintiffs, dismissal of the tortious interference count was proper.

The Court reversed the dismissal of plaintiff’s breach of contract claims, however. This was because the affidavit filed in support of defendant’s Section 2-619 motion didn’t qualify as affirmative matter.  An affirmative matter is any defense other than a negation of the essential allegations of the plaintiff’s cause of action.  Affirmative matter is not evidence a defendant expects to contest an ultimate fact alleged in a complaint.

Here, defendants’ Section 2-619 affidavit effectively plaintiffs’ allegations were “not true:” that defendants didn’t owe plaintiffs any commissions.  The Court found that a motion affidavit that simply denies a complaint’s material facts does not constitute affirmative matter. (¶¶ 56-59)

Afterwords:

Byram provides a useful summary of the relevant guideposts and distinctions between section 2-615 and 2-619 motions to dismiss. Where a supporting affidavit merely disputes plaintiff’s factual allegations, it will equate to a denial of the plaintiff’s allegations. Such an affidavit will not constitute proper affirmative matter than wholly defeats a claim.

The case also provides value for its discussion of the Darwinian privilege defense to tortious interference. When a defendant acts to protect herself or her business, she can likely withstand a tortious interference claim by a competitor – even where that competitor is deprived of a remedy.

Texas Arbitration Provision Sounds Death Knell For Illinois Salesman’s Suit Against Former Employer – IL ND

(“Isn’t that remarkable…..”)

The Plaintiff in Brne v. Inspired eLearning, 2017 WL 4263995, worked in sales for the corporate publisher defendant.  His employment contract called for arbitration in San Antonio, Texas.

When defendant failed to pay plaintiff his earned commissions, plaintiff sued in Federal court in his home state of Illinois under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 (“IWPCA”). Defendant moved for venue-based dismissal under Rule 12(b)(3)

The Illinois Northern District granted defendant’s motion and required the plaintiff to arbitrate in Texas.  A Rule 12(b)(3) motion is the proper vehicle to dismiss a case filed in the wrong venue. Once a defendant challenges the plaintiff’s venue choice, the burden shifts to the plaintiff to establish it filed in the proper district.  When plaintiff’s chosen venue is improper, the Court “shall dismiss [the case], or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.” 28 U.S.C. § 1406(a).

Upholding the Texas arbitration clause, the Illinois Federal court noted the liberal federal policy favoring arbitration agreements except when to do so would violate general contract enforceability rules (e.g. when arbitration agreement is the product of fraud, coercion, duress, etc.)

The Court then turned to plaintiff’s argument that the arbitration agreement was substantively unconscionable.  An agreement is substantively unconscionable where it is so one-sided, it “shocks the conscience” for a court to enforce the terms.

The plaintiff claimed the arbitration agreement’s cost-sharing provision and absence of fee-shifting rendered it substantively unconscionable.

Cost Sharing Provision

Under Texas and Illinois law, a party seeking to invalidate an arbitration agreement on the ground that arbitration is prohibitively expensive must provide individualized evidence to show it will likely be saddled with excessive costs during the course of the arbitration and is financially incapable of meeting those costs.  The fact that sharing arbitration costs might cut in to a plaintiff’s recovery isn’t enough: without specific evidence that clearly demonstrates arbitration is cost-prohibitive, a court will not strike down an arbitration cost-sharing provision as substantively unconscionable.  Since plaintiff failed to offer competent evidence that he was unable to shoulder half of the arbitration costs, his substantive unconscionability argument failed

Fee-Shifting Waiver

The plaintiff’s fee-shifting waiver argument fared better.  Plaintiff asserted  then argued that the arbitration agreement’s provision that each side pays their own fees deprived Plaintiff of his rights under the IWPCA (see above) which, among other things, allows a successful plaintiff to recover her attorneys’ fees. 820 ILCS 115/14.

The Court noted that contractual provisions against fee-shifting are not per se unconscionable and that the party challenging such a term must demonstrate concrete economic harm if it has to pay its own lawyer fees.  The court also noted that both Illinois and Texas courts look favorably on arbitration and that arbitration fee-shifting waivers are unconscionable only when they contradict a statute’s mandatory fee-shifting rights and the statute is central to the arbitrated dispute.

The court analogized the IWPCA to other states’ fee-shifting statutes and found the IWPCA’s attorneys’ fees section integral to the statute’s aim of protecting workers from getting stiffed by their employers.  The court then observed that IWPCA’s attorney’s fees provision encouraged non-breaching employees to pursue their rights against employers.  In view of the importance of the IWPCA’s attorneys’ fees provision, the Court ruled that the arbitration clause’s fee-shifting waiver clashed materially with the IWPCA and was substantively unconscionable.

However, since the arbitration agreement contained a severability clause (i.e. any provisions that were void, could be excised from the arbitration contract), the Court severed the fee-shifting waiver term and enforced the balance of the arbitration agreement.  As a result, plaintiff must still arbitrate against his ex-employer in Texas (and cannot litigate in Illinois).

Afterwords:

This case lies at the confluence of freedom of contract, the strong judicial policy favoring arbitration and when an arbitration clause conflicts with statutory fee-shifting language.  The court nullified the arbitration provision requiring each side to pay its own fees since that term clashed directly with opposing language in the Illinois Wage Payment and Collection Act.  Still, the court enforced the parties’ arbitration agreement – minus the fee provision.

The case also provides a useful synopsis of venue-based motions to dismiss in Federal court.

 

 

 

 

‘Surviving Partner’ Statute Defeats Fraud Suit in Mobile Home Spat – IL Court

The plaintiff in Jett v. Zeman Homes sued a mobile home seller for fraud and negligence after it failed to disclose a home’s history of mold damage and location in a flood zone.  The plaintiff’s claims were premised mainly on an agent of the defendant mobile home owner who died during the course of the litigation.  Affirming summary judgment for the owner, the court considered and answered some important questions on the applicability of common law and consumer fraud actions to the real estate context and when the death of an agent will immunize a corporate principal for claims based on the deceased agent’s comments.

The plaintiff’s fraud claims alleged that defendant’s agent made material misrepresentations that there was not a mold problem in the mobile home park and that any mold the plaintiff noticed in her pre-purchase walk-through was an isolated occurrence.  Plaintiff also alleged the seller’s agent failed to disclose a history of flooding on the property the mobile home occupied and the home’s lack of concrete foundation which contributed to flooding in the home.

Plaintiff’s negligence count alleged defendant breached duties of disclosure delineated in Section 21 of the Mobile Home Landlord and Tenant Rights Act. 765 ILCS 745/21 (West 2016). Plaintiff alleged defendant breached its duty to her by failing to disclose the home’s history of mold infestation and failure to alleviate the mold problem after plaintiff notified defendant.

The appeals court rejected the plaintiff’s fraud claims based on Illinois Evidence Code Section 301 which provides that a party who contracts with a now-deceased agent of an adverse party is not competent to testify to any admission of the deceased agent unless the admission was made in the presence of other surviving agents of the adverse party. 735 ILCS 5/8-301 (West 2016).  This is an application of the “Dead Man’s Act” (see 735 ILCS 5/8-201) principles to the principal-agent setting.

Applying this surviving agent rule, the Court noted that plaintiff admitted in her deposition that the predicate statements giving rise to both her common law and statutory fraud counts were made solely by the deceased defendant’s agent.  Since plaintiff could not identify any other agents of the defendant who were present when the deceased agent made statements concerning prior mold damage on the home, she could not attribute a materially false statement (a common law fraud element) or a deceptive act or practice (a consumer fraud element) to the defendant.

The appeals court also affirmed summary judgment for the defendant on plaintiff’s negligence count.  An Illinois negligence plaintiff must plead and prove: (1) the existence of a duty of care owed to the plaintiff by the defendant; (2) a breach of that duty, and (3) an injury proximately caused by that breach.

Since the lease agreement attached to plaintiff’s complaint demonstrated that the owner/lessor was someone other than the defendant, the plaintiff could not establish that defendant owed plaintiff a legal duty.

Afterwords:

A fraud plaintiff relying on statements of a deceased agent to hold a principal (e.g. an employer) liable, will have to prove the statement in question was made in the presence of surviving agents.  Otherwise, as this case shows, Illinois’ surviving partner or joint contractor statute will defeat the claim by barring the plaintiff from presenting evidence of the deceased’s statements or conduct.

 

Non-Shareholder Can Be Liable On Alter-Ego and Veil Piercing Theory – IL Bankruptcy Court

Buckley v. Abuzir  will likely be viewed as a watershed in piercing the corporate veil litigation because of its exhaustive analysis of when a non-shareholder can be personally liable for corporate debts.  In that case, the court provides an extensive survey of how nearly every jurisdiction in the country has decided the non-shareholder piercing question.

In re Tolomeo, 2015 WL 5444129 (N.D.Ill. 2015) considers the related question of whether a creditor can pierce the corporate veil of entities controlled by a debtor non-shareholder so that those entities’ assets become part of the debtors’ bankruptcy estate.

The answer: “yes.”  In their complaint, the creditors sought a determination that three companies owned by the debtor’s wife but controlled by the debtor were the debtors’ alter-egos.  The creditors of the debtor also sought to pierce the companies’ corporate veils so that the companies’ assets would be considered part of the debtor’s bankruptcy estate.  This would have the salutary effect of providing more funds for distribution to the various creditors.  After striking the debtor’s defenses to the complaint, the court granted the creditors motion for judgment on the pleadings. In doing so, the bankruptcy court applied some fundamental piercing principles to the situation where an individual debtor controls several companies even though he is not a nominal shareholder of the companies.

In Illinois, a corporation is a legal entity separate and distinct from its shareholders. However, this separateness will be disregarded where limited liability would defeat a strong equitable claim of a corporate creditor.

A party who seeks to set aside corporate liability protection on an alter-ego basis must make the two-part showing that (1) the company was so controlled and manipulated that it was a mere instrumentality of another entity or individual; and (2) misuse of the corporate form would promote fraud or injustice.

The mere instrumentality factors include (a) inadequate capitalization, (b) a failure to issue stock, (c) failure to observe corporate formalities, (d) nonpayment of dividends, (e) insolvency of the debtor corporation, (f) nonfunctioning officers or directors, (g) lack of corporate records, (h) commingling of funds, (i) diversion of assets from the corporation by or to a shareholder, (j) failure to maintain arm’s length relationships among related entities; and (k) the corporation being a mere façade for the dominant shareholders.

Promotion of injustice (factor (2) above)), in the veil piercing context, requires less than a showing of fraud but something more than the prospect of an unsatisfied judgment.

The court echoed Buckley and found that the corporate veil can be pierced to reach the assets of an individual even where he is not a shareholder, officer, director or employee.

The key question is whether a person exercises “equitable ownership and control” over a corporation to such an extent that there’s no demarcation between the corporation and the individual.  According to the court, making shareholder status a prerequisite for piercing liability elevates form over substance.

Applying these standards, the court found the circumstances ripe for piercing. The debtor controlled the three entities as he handled the day-to-day operations of the companies. He also freely shifted money between the entities and regularly paid his personal bills from company bank accounts. Finally, the court noted an utter lack of corporate records and threadbare compliance with rudimentary formalities. Taken together, the court found that the factors weighed in favor of finding that the three companies were the debtor’s alter-egos and the three entities should be considered part of the debtor’s bankruptcy estate.

Take-aways:

1/ A defendant’s status as a corporate shareholder will not dictate whether or not his assets can be reached in an alter-ego or veil piercing setting.

2/ If non-shareholder sufficiently controls a corporate entity, he can be responsible for the corporate debts assuming other piercing factors are present.

3/ Veil piercing can occur absent actual fraud by a controlling shareholder.  The creditor plaintiff must show more than a mere unpaid debt or unsatisfied judgment, though.  Instead, there must be some element of unfairness present for a court to set aside corporate protection and fasten liability to the individual.

 

 

Lender’s Reliance on Predecessor Bank’s Loan Documents Satisfies Business Records Hearsay Rule – IL First Dist.

A commercial guaranty dispute provides the background for the First District’s recent discussion of some signature litigation issues including the voluntary (versus compulsory) payment rule and how that impacts an appeal, the business records hearsay exception, and governing standards for the recovery of attorneys fees.

The lender plaintiff in Northbrook Bank & Trust Co. v. Abbas, 2018 IL App (1st) 162972 sued commercial loan guarantors for about $2M after a loan default involving four properties.
On appeal, the lender argued that the guarantors’ appeal was moot since they paid the judgment. Under the mootness doctrine, courts will not review cases simply to establish precedent or guide future litigation. This rule ensures that an actual controversy exists and that a court can grant effective relief.

A debtor’s voluntary payment of a money judgment prevents the paying party from pursuing an appeal. Compulsory payment, however, will not moot an appeal.
The court found the guarantors’ payment compulsory in view of the lender’s aggressive post-judgment efforts including issuing multiple citations and a wage garnishment and moving to compel the guarantors’ production of documents in the citation proceeding. Faced with these post-judgment maneuvers, the Court found the payment compulsory and refused to void the appeal. (⁋⁋ 24-27)

The First District then affirmed the trial court’s admission of the lender’s business records into evidence over the defendant’s hearsay objection.  To admit business records into evidence, the proponent (here, the plaintiff) must lay a proper foundation by showing the records were made (1) in the regular course of business, and (2) at or near the time of the event or occurrence. Illinois Rule of Evidence 803(6) allows “records of regularly conducted activity” into evidence where (I) a record is made at or near the time, (ii) by or from information transmitted by a person with knowledge, (iii) if kept in the regular course of business and (iv) where it was the regular practice of that business activity to make the record as shown by the custodian’s or other qualified witness’s testimony.

The theory on which business records are generally admissible is that their purpose is to aid in the proper transaction of business and the records are useless unless accurate. Because the accuracy of business records is vital to any functioning commercial enterprise, “the motive for following a routine of accuracy is great and motive to falsify nonexistent.” [¶¶ 47-48]

With computer-generated business records, the evidence’s proponent must establish (i) the equipment used is industry standard, (ii) the entries were made in the regular course of business, (iii) at or near the time of the transaction, and (iv) the sources of information, method and time of preparation indicate the entries’ trustworthiness. Significantly, the person offering the business records into evidence (either at trial or via affidavit) isn’t required to have personally entered the data into the computer or even learn of the records before the litigation started. A witness’s lack of personal knowledge concerning the creation of business records affects the weight of the evidence; not its admissibility. [¶ 50]

Here, the plaintiff’s loan officer testified he oversaw defendants’ account, that he personally reviewed the entire loan history as part of his job duties and authenticated copies of the subject loan records. In its totality, the Court viewed the bank officer’s testimony as sufficient to admit the loan records into evidence.

Next, the Court affirmed the trial court’s award of attorneys’ fees to the lender plaintiff. Illinois follows the ‘American rule’: each party pays its own fees unless there is a contract or statutory provision providing for fee-shifting. If contractual fee language is unambiguous, the Court will enforce it as written.

A trial court’s attorneys’ fee award must be reasonable based on, among other things, (i) the nature and complexity of the case, (ii) an attorney’s skill and standing, (iii) degree of responsibility required, (iv) customary attorney charges in the locale of the petitioning party, and (v) nexus between litigation and fees charged. As long as the petitioner presents a detailed breakdown of fees and expenses, the opponent has a chance to present counter-evidence, and the court can make a reasonableness determination, an evidentiary hearing isn’t required.

Afterwords:

Abbas presents a useful, straightforward summary of the business records hearsay exception, attorneys’ fees standards and how payment of a judgment impacts a later right to appeal that judgment.

The case also illustrates how vital getting documents into evidence in breach of contract cases and the paramount importance of clear prevailing party fee provisions in written agreements.

 

Shortened ‘Arb Award’ Rejection Deadline Upheld Against Constitutional Attack – IL Appeals Court

The First District appeals court recently nixed a plaintiff’s constitutional challenge to a local rule’s arbitration rejection deadline.  The opinion’s upshot is clear: when a supreme court rule conflicts with a statute, the rule wins.

The plaintiff in McBreen v. Mercedes-Benz, USA, LLC  argued her equal protection and due process rights were violated when a trial court denied her attempt to tardily reject an arbitration award. The case was decided by a single arbitrator under the auspices of the Cook County Law Division Mandatory Arbitration Program (MAP), a two-year pilot program that sends commercial cases with damage claims between $50,000 and $75,00 to mandatory arbitration.

Among other things, the Law Division MAP provides for hearings before a single arbitrator and requires a losing party to reject the award within seven business days. Cook County Cir. Ct. R. 25.1, 25.5, 25.11.

After an arbitrator found for defendants, the plaintiff didn’t reject the award until 30 days later – 23 days too late. The trial court then granted defendant’s motion to dismiss plaintiff’s case and denied plaintiff’s motion to void the arbitration award or extend the rejection deadline.  The trial court entered judgment on the arbitration award for defendant.

Plaintiff argued on appeal that Rule 25’s compressed rejection period violated her constitutional rights since it conflicted with the  30-day rejection deadline for Municipal Department arbitrations. (The Cook County Municipal Department hears personal injury cases and breach of contract suits where the damage claim is $30,000 or less.)   The plaintiff also claimed the Law Division MAP was unconstitutional since it clashed with the “panel of three” arbitrators rule prevailing in Municipal Department arbitrations.

Affirming the trial court, the Court first considered whether the Illinois Supreme Court had power to establish the Law Division MAP program with its seven-day rejection rule.

The Law Division MAP rejection period conflicts with Cook County’s Municipal Department arbitration scheme – which has a 30-day rejection rule.  (The Municipal arbitration rules, codified in Supreme Court Rules 86-95, were legislatively implemented via Code Sections 2-1001A and 1003A which, respectively, authorize the establishment of an arbitration program where a panel of three arbitrators hears cases involving less than $50,000 in damages. Rule 93(a) contains the 30-day rejection cut-off.)

The First District noted that while the Law Division MAP’s seven-day rejection period clashes with the Municipal Department’s 30-day period, Illinois courts through the decades consistently recognize the Illinois Supreme Court’s constitutional authority to make rules governing practice and procedure in the lower courts and that where a supreme court rule conflicts with a statute on a judicial procedure matter, the rule wins.

The court also notes the Illinois legislature echoed this inherent power for the Supreme Court to establish court rules in Code Section 1-104(a).  In the end, the Court found that In view of the Illinois Supreme Court’s expansive power in the area of pleadings, practice and procedure, the Law Division MAP’s abbreviated rejection period trumped any conflicting, longer rejection period found in other statutes or rules.  (¶¶ 17-18, 22-23).

The Court also rejected plaintiff’s equal protection argument – that the Law Division MAP program infringed the rights of Municipal court participants by shortening the rejection time span from 30 to seven days.  While allowing that Law Division and Municipal litigants in the arbitration setting share the same objective of taking part in a less-costly alternative to litigation, the Court found the two Programs “qualitatively different:” the Law Division MAP is geared to those seeking damages of between $50,000 and $75,000 while the Municipal plaintiff’s damages are capped at $30,000.

According to the Court, the different damage ceilings involved in Law Division and Municipal cases meant that plaintiffs in the two court systems aren’t similarly situated under the Equal Protection clause. (¶¶ 34-35).

Plaintiff’s final argument, that the Law Division MAP’s seven-day rejection period violated her due process rights also failed.  Due process requires an opportunity to be heard at a meaningful time and in a meaningful matter.

The plaintiff argued that the Law Division MAP’s seven-day rejection cut-off failed to give her a meaningful opportunity to challenge the award.   The Court thought otherwise.  It noted that statutes are presumed constitutional and someone challenging a statute’s constitutionality bears a heavy burden.  It then cited to multiple cases across a wide strata of facts which have upheld time limits of less than 30 days.

Afterwords:

McBreen offers a thorough, triangulated analysis of what happens when a Supreme Court Rule, a county’s local court rule and legislative enactments all speak to the same issue and appear to contradict each other.  The case solidifies the proposition that the Supreme Court’s primacy in the realm of lower court procedure and pleading extends to mandatory arbitration regimes, too.  While the case is silent on what constitutes a sufficient basis to extend the Law Division MAP’s seven-day rejection deadline, McBreen makes clear that a constitutional challenge will likely ring hollow.

 

Massive Wind Turbine Tower A Trade Fixture, Not Lienable Property Improvement – IL Second Dist.

AUI Construction Group, LLC v. Vaessen, 2016 IL App (2d) 160009 wrestles with whether a massive wind turbine tower that can be removed only by detonating several bombs at a cost of over half a million dollars qualifies as a lienable property improvement or is a non-lienable trade fixture under Illinois law.

The property owner and turbine seller signed an easement agreement for the seller to install a turbine on defendant’s land for an annual fee.  The easement provided the turbine would remain the seller’s property and that the seller must remove the structure on 90 days’ notice.  The seller also had to remove the turbine when the easement ended.  The turbine seller then contracted with a general contractor to install the turbine who, in turn, subcontracted out various aspects of the installation.

The owner-general contractor agreement and the downstream subcontracts referenced the easement and stated the turbine system remained the seller’s property.

When the plaintiff sub-subcontractor didn’t get paid, he sued its subcontractor, ultimately getting an arbitration award of over $3M.  When that proved uncollectable after the subcontractor’s bankruptcy, the plaintiff sued the property owner to foreclose a mechanics lien it previously recorded to recover the unpaid judgment.  The trial court dismissed the suit on the basis that the turbine was a removable trade fixture that was non-lienable as a matter of law.

Affirming, the Second District first noted that Illinois’ Mechanics Lien Act (770 ILCS 60/0.01 et seq.)(MLA) protects those who furnish material or labor for the improvement of real property.  The MLA allows a claimant to record a lien where its labor, materials or services improves the property’s value. In Illinois, real estate improvements are lienable; trade fixtures are not.

The factors considered in determining whether equipment is lienable includes (1) the nature of attachment to the realty, (2) the equipment’s adaptation to and necessity for the purpose to which the premises are devoted, and (3) whether it was intended that the item in question should be considered part of the realty.  Crane Erectors & Riggers, Inc. v. LaSalle National Bank, 125 Ill.App.3d 658 (1984).

Intent (factor (3)) is paramount.  Even where an item can be removed from land without injuring it, doesn’t mean the item isn’t lienable. So long as the parties manifest an intent to improve the realty, a removable item can still be lienable.  Moreover, parties are free to specify in their contract that title to equipment furnished to property will not pass to the land owner until its fully paid for.

Applying the three-factored fixture test, the court found the  nature of attachment, and necessity of the item for production of wind energy weighed in favor of finding the turbine lienable.   However, the all-important intent factor (factor number 3 above) suggested the opposite.

The easement agreement specified the turbine seller retained its ownership interest in the turbine and could (and had to) remove it at the easement’s end.  The court wrote: “the easement agreement establishes that the tower was a trade fixture.”  (¶ 20)

The Court also found that plaintiff’s “third party” rights were not impacted since plaintiff’s sub-subcontract specifically referenced the easement and prime contract – both of which stated the turbine would remain seller’s property. (¶ 23)

The Court examined additional factors to decide whether the turbine was lienable.  From a patchwork of Illinois cases through the decades, the Court looked at (1) whether the turbine provided a benefit or enhancement to the property, (2) whether the turbine was removable without material damage to the property, (3) whether it was impractical to remove the item, (4) whether the item (turbine) was used to convert the premises from one use to another, and (5) the agreement and relationship between the parties.

The sole factor tilting (no pun intended) in favor of lienability was factor 4 – that the turbine was essential to converting the defendant’s land from farmland to harnessing of wind energy.  All other factors pointed to the turbine being a nonlienable trade fixture.

The Court noted the property owner didn’t derive a benefit from the turbine other than an annual rent payment it received and rent is typically not lienable under the law.  The Court also pointed out that the tower could be removed albeit it through a laborious and expensive process.  Lastly, and most importantly, the parties’ intent was that the turbine was to remain seller’s personal property and for it not to be a permanent property improvement. (¶¶ 38-39)

The Court also rejected the subcontractor’s remaining arguments that (1) the Illinois Property Tax Code evinced a legislative intent to view wind turbines as lienable improvements and (2) it is unfair to disallow the plaintiff’s lien claim since it could not have a security interest in the turbine under Article 9 of the Uniform Commercial Code (UCC).

On the tax issue, the Court held that Illinois taxes turbines to ensure that wind turbines do not escape taxation and is purely a revenue-generating device.  Taxation of a structure is not a proxy for lienability. (¶¶ 43-44)

The Court agreed with that the subcontractor plaintiff did not have a security interest in the turbine under UCC Section 9-334 since, under that section, security interests do not attach to “ordinary building materials incorporated into an improvement on land.”  Since the turbine was replete with building materials (e.g. concrete, rebar, electrical conduit), the UCC didn’t give the plaintiff a remedy.  The Court allowed that this was a harsh result but the parties’ clear intent that the turbine remain the seller’s personal property trumped the policy arguments.

Afterwords:

This case strikes a blow to contractors who install large structures on real estate. Even something as immense as a multi-piece turbine system, which seemingly has a “death grip”- level attachment to land, can be nonlienable if that’s what the parties intended.

Another case lesson is for contractors to be extra diligent and insist on copies of all agreements referenced in their contracts to ensure their rights are protected in other agreements to which they’re not a party.

The case also portrays some creative lawyering.  The court’s discussion of the taxability of wind turbines, UCC Article 9 and the difference between a lease (which can be lienable) and an easement (which cannot) and how it impacts the lienability question makes for interesting reading.

 

Set-off Is Counterclaim; Not Affirmative Defense – IL Court Rules in Partition Suit

Stadnyk v. Nedoshytko, 2017 IL App (1st) 152103-U views the counterclaim-versus-affirmative defense distinction through the prism of a statutory partition suit involving co-owners of a Chicago apartment building.

The plaintiff sued to declare the parties’ respective ownership rights in the subject property.  After the court issued a partition order finding the plaintiff and defendants had respective 7/8 and 1/8 ownership interests.  After the trial court ordered a partition of the property, the defendants filed affirmative defenses titled unjust enrichment, breach of fiduciary duty and equitable accounting.  Through all the “defenses” defendants sought to recoup property maintenance and repair expenses they made through the years.

The trial court struck defendants’ affirmative defenses on the basis that they were actually counterclaims and not defenses. The court also refused to award statutory attorneys’ fees to the plaintiff.  Each side appealed.

Affirming the trial court’s striking of the defendants’ affirmative defenses, the First District initially considered the difference between an affirmative defense and a counterclaim.

Code Section 2-608 provides that counterclaims in the nature of “setoff, recoupment, cross-claim or otherwise, and whether in tort or contract, for liquidated or unliquidated damages, or for other relief, may be pleaded as a cross claim in any action, and when so pleaded shall be called a counterclaim.” 735 ILCS 5/2-608

Code Section 2-613 governs affirmative defenses and requires the pleader to allege facts supporting a given defense and gives as examples, payment, release, satisfaction, discharge, license, fraud, duress, estoppel, laches, statute of frauds, illegality, contributory negligence, want or failure of consideration. 735 ILCS 5/2-613.

Counterclaims differ from affirmative defenses in that counterclaims seek affirmative relief while affirmative defenses simply seek to defeat a plaintiff’s cause of action.  In this case, the defendants’ did not seek to defeat plaintiff’s partition suit.  Instead, the defendants sought post-partition set-offs against sale proceeds going to plaintiff for defendants’ property maintenance and repair expenses.

A setoff is a counterclaim filed by a defendant on a transaction extrinsic to the subject of plaintiff’s suit.  Since the defendants styled their affirmative defenses as sounding in setoff and accounting – two causes of action (not defenses) – the Court affirmed the trial court’s striking the defenses.

The Court also reversed the trial court’s order refusing to apportion plaintiff’s attorneys fees.  Section 17-125 of the partition statute provides that a partition plaintiff’s attorney can recover his fees apportioned among the various parties since, in theory, the attorney acts for all interested parties.  However, where a party mounts a “good and substantial defense to the complaint,” the plaintiff’s attorneys’ fees should not be spread among the litigants. 735 ILCS 5/17-125.

Here, the defendants attempted to raise defenses (setoff and public sale, as opposed to private, was required) but only after the trial court entered the partition order.  Since the defendants didn’t challenge plaintiff’s partition request but instead sought a setoff for defendants’ contributions to the property and a public sale of the property, the trial court correctly concluded the defendants failed to raise good and substantial defenses under the partition statute.  As a consequence, the trial court should have apportioned plaintiff’s attorneys’ fees.

Afterwords:

Stadnyk cements the proposition that a counterclaim differs from an affirmative defense and that setoff fits into the former category.  The case also stresses that where a defendant seeks to recover damages from a plaintiff based on a collateral transaction (other than the one underlying the plaintiff’s lawsuit), defendant should file a counterclaim for a setoff rather than attempt to raise the setoff as a defense.

Other critical holdings from the case include that a court of equity lacks power to go against clear statutory language that require a public sale and partition plaintiff attorneys’ fees should only be apportioned where a defendant doesn’t raise a substantial defense to the partition suit.

 

 

Bank Escapes Liability Where It Accepts Two-Party Check With Only One Indorsement – IL ND

BBCN Bank v. Sterling Fire Restoration, Ltd., 2016 WL 691784 homes in on the required showing to win a motion for judgment on the pleadings in Federal court, the scope of a general release, and the UCC section governing joint payee or “two-party” checks.

The plaintiff, an assignee of a fire restorer’s claim who did some repair work on a commercial structure, sued two banks for paying out on a two-party check (the “Check”) where only one payee indorsed it. The Assignor was a payee on the Check but never indorsed it.

The banks moved for summary judgment on the ground that the assignor previously released its claims to the Check proceeds in an earlier lawsuit and filed a third-party suit against the assignor for indemnification.  The assignor moved for judgment on the pleadings on the banks’ third-party action.

Result: Bank defendants’ motions for summary judgment granted; Assignor’s judgment on the pleadings motion (on the banks’ third-party indemnification claims) denied.

Rules/Reasons:

FRCP 12(c) governs motions for judgment on the pleadings.  A party can move for judgment on the pleadings after the complaint and answer have been filed.  When deciding a motion for judgment on the pleadings, the Court considers only the contents of the filed pleadings – including the complaint, answer, and complaint exhibits.  Like a summary judgment motion, a motion for judgment on the pleadings should be granted only if there are no genuine issues of material fact to be resolved at trial.

FRCP 56 governs summary judgment motions.  A party opposing a summary judgment must “pierce” (go beyond) the pleadings and point to evidence in the record (depositions, discovery responses, etc.) that creates a genuine factual dispute that must be decided after a trial on the merits.

UCC section 3-110 applies to checks with multiple payees.  It provides that if an instrument is jointly payable to 2 or more persons (not “alternatively”), it can only be negotiated, discharged or enforced by all of the payees.  810 ILCS 5/3-110(d).

Here, since both payees did not sign the Check, the banks plainly violated section 3-110 by accepting and paying it.  The Check was payable to two parties and only one signed it.

The banks still escaped liability though since the assigning restoration company previously released its claims to the Check proceeds.  In Illinois, a general release bars all claims a signing party (the releasor) has actual knowledge of or that he could have discovered upon reasonable inquiry.

Here, the assignor’s prior release of the bank defendants was binding on the plaintiff since an assignee cannot acquire greater rights to something than its assignor has.  And since the plaintiff’s claim against the banks was previously released by plaintiff’s assignor, plaintiff’s lawsuit against the banks were barred.

The Assignor’s motion for judgment on the pleadings on the banks’ third-party claims was denied due to factual disputes.  Since the court could not tell whether or not the assignor misrepresented to the plaintiff whether it had assigned its claim by looking only at the banks’ third-party complaint and the assignor’s answer, there were disputed facts that could only be decided after a trial.

Take-aways:

  • Motions for judgment on the pleadings and summary judgment motions will be denied if there is a genuine factual dispute for trial;
  • A summary judgment opponent (respondent) must produce evidence (not simply allegations in pleadings) to show that there are disputed facts that can only be decided on a full trial on the merits;
  • The right remedy for a UCC 3-110 violation is a conversion action under UCC section 3-420;
  • In sophisticated commercial transactions, a broadly-worded release will be enforced as written.

 

Turnover Order Against Debtor’s Wife’s Company Upheld – IL First District

While the amount of the turnover order – less than $6,000 – challenged in Xcel Supply, LLC v. Horowitz, 2018 IL App (1st) 162986 was but a fraction of the underlying judgment – over $600,000 – the case provides a useful discussion of the interplay between Section 2-1402 and Rule 277 – Illinois’s twin supplementary (post-judgment) proceedings authorities – and when a third-party citation respondent is entitled to an evidentiary hearing.

About a month after a trial court entered a money judgment against defendant, his wife – through her company – wrote six checks to the defendant/ judgment debtor over a three-month span totaling $5,220.

On the creditor’s turnover motion, the trial court ordered the debtor’s wife and third-party citation respondent (the Respondent) to turn over $5,220 to plaintiff’s counsel (defendant’s wife’s company). The Respondent appealed.

Affirming, the Court examined Code Section 2-1402 and Rule 277 to assess whether the turnover order was supported by competent proof.

Code Section 2-1402(a) permits a judgment creditor to prosecute supplementary proceedings to discover assets or income of the debtor and apply assets or income discovered toward the payment of the judgment.

The creditor can initiate post-judgment proceedings against the debtor or any other third party who may have information concerning income or assets belonging to the judgment debtor.

Code Section 2-1402 vests the Court with broad powers to compel any person to deliver assets to be applied towards satisfaction of the judgment in situations where the judgment debtor can recover those assets. An order compelling a third-party to deliver assets in full or partial satisfaction of the judgment is called a turnover order. A court can enter judgement against someone who violates a citation’s restraining provision in the amount of the property transferred or up to the judgment amount. 2-1402(f)(1); ⁋⁋ 40-41.

Rule 277 works in tandem with Section 2-1402 and specifies how supplementary proceedings are conducted. Among other things, the Rule allows “any interested party” to subpoena witnesses and adduce evidence in the same manner it could at a civil trial.

Where a judgment creditor and third-party citation respondent each claim superior rights to the same debtor assets, the trial court should conduct an evidentiary hearing. However, where only the judgment creditor is claiming rights in the debtor’s assets, the trial court can decide the post-judgment proceeding without an evidentiary hearing.

Here, because the Respondent was the debtor’s wife – the Court viewed her as an illusory citation respondent. That is, the debtor and Respondent acted as a united front. Because this was not the prototypical “tug-of-war” between a judgment creditor and third-party citation respondent, the trial court was able to rule on the respondent’s argument without an evidentiary hearing.

The Court also rejected the respondent’s argument that the turnover order lacked an evidentiary basis. The Court noted that the judgment debtor admitted in his affidavit to cashing all six checks from the Respondent’s company and that Respondent did nothing to stop him from cashing the checks.

Since the Respondent never challenged the debtor’s right to cash the checks, the Court viewed it as strong proof that the checks were the debtor’s property to spend as he pleased.

Finally, the Court rejected Respondent’s argument that the money sent to the debtor wasn’t really his money as the funds were earmarked for their children’s expenses. According to the court, since both the debtor and Respondent had equal parental obligations to pay their children’s expenses, whether or not the money was for child expenses didn’t negate the trial court’s finding that the checks were defendant’s property and Respondent violated the citation by transferring the checks to the defendant after the date of the money judgment.

Afterwords: This case shows that citation restraining provisions which bar a third-party citation respondent from transferring money or property belonging to or to become due a judgment debtor have teeth.

While an evidentiary hearing is normally required where there are competing claimants to the same pool of assets, this rule is relaxed where the citation respondent is aligned (here, through marriage) with the debtor. In such a case, the court will look beyond the legal nomenclature and assess the reality of the parties’ relationship. Where the third-party citation respondent doesn’t have a meaningful claim to transferred debtor assets, the Court can decide a turnover motion without hearing live witness testimony.

Lost Profits: Direct Or Indirect Damages? (And Why It Matters)

Two species of compensation in breach of contract lawsuits are (1) direct damages and (2) indirect damages.  The former allows a plaintiff to recover money damages that flow directly from a breach while the latter – sometimes labeled “consequential” damages – are more remote and separated from the breach.

Deciphering the difference between the two damage regimes is easy in theory but often difficult in practice.

At the intersection of the two damages types lies the lost profits remedy.  Lost profits damages allow the non-breaching party to recover profits he would have earned had the breaching party performed under the terms of the contract.  They (lost profits) divide into direct or indirect damages depending on the facts.

Westlake Financial Group, Inc. v. CDH-Delnor Health System, 2015 IL App(2d) 140589 spotlights the lost profits question in a dispute between two businesses over an insurance brokerage contract (the “Insurance Contract”) and a separate on-line claims tracking agreement (“the Tracking Contract”).

Both contracts spanned four years with 60-day termination clauses.  The plaintiff sued when the defendant prematurely cancelled both Contracts with more than two years left on them.  Plaintiff sought damages for lost Insurance Contract insurance commissions and for fees it would have earned under the Tracking Contract.

The trial court granted the defendant’s motion to dismiss and the plaintiff appealed.

Result: Reversed in part.

The trial court dismissed the bulk of plaintiff’s claims based on a limitation of damages clause in the Insurance Contract that immunized the defendant from consequential damages.

In Illinois, contract damages are measured by the amount of money needed to place the plaintiff in  the same position he would be if the contract was performed.  Damage limitation provisions in contracts are enforced so long as they don’t offend public policy.  These limitation clauses are strictly construed against the party benefitting from them.  (¶¶ 29-30).

Direct damages or “general damages” flow directly and without interruption from the type of wrong alleged in a complaint.  By contrast, indirect or consequential damages are losses that are removed from the breach and usually involve an intervening event that causes the damage.

Lost profits can constitute either direct damages or indirect damages depending on the facts.  Where a plaintiff’s lost profits damages result directly from a defendant’s breach, the lost profits are recoverable as direct damages.

A prototypical direct lost profits damages example cited by the court is where a phone directory publisher is liable for lost profits caused by its failure to include a business’s name in the directory.  In that scenario, any lost profits suffered by the business are directly attributable to the publisher’s failure to publish the business name in the directory – the very thing it was hired to do.  (¶¶ 32-35).

The Insurance Contract here contained a consequential damages exclusion and specifically mentioned lost profits as a type of consequential damages.  Still, the court found that the exclusion did not bar plaintiff’s direct lost profits claim.  The court noted that the Insurance Contract’s damage limitation provision only mentioned lost profits as an example of consequential damages.  It didn’t say that lost profits were categorically excluded.

The court also rejected defendant’s argument that plaintiff’s claimed damages were too speculative to merit recovery.

Under Illinois law, damages are speculative where their existence is uncertain; not when there amount is uncertain.

Since lost profits can’t be proven with mathematical certainty, the plaintiff only has to show a “reasonable basis” for their (lost profits) computation.  (¶ 51).

Since the plaintiff premised its Insurance Contract lost profits claim on a four-year track record of calculable insurance commissions, the court found the plaintiff sufficiently pled the existence of damages.  Any dispute in the amount of plaintiff’s damages was an issue later for trial.  At the motion to dismiss stage, plaintiff sufficiently pled a breach of contract claim.  (¶¶ 52-53).

Afterwords:

– Consequential damages exclusion that mentions lost profits – as a type or example of consequential damages – won’t preclude lost profits that are a direct result (as opposed to an indirect result) of the breach of contract;

– A business plaintiff’s past profits from prior years can serve as sufficient gauge of future lost profits in a breach of contract claim.

 

Creditor (Bank) -Debtor (Borrower) Relationship Not A Fiduciary One – IL First Dist. (I of II)

Kosowski v. Alberts, 2017 IL App (1st) 170622 – U, examines some signature commercial litigation remedies against the factual backdrop of a business loan default.

The plaintiffs, decades-long business partners in the printing and direct mail industry, borrowed money under a written loan agreement that gave the lender wide-ranging remedies upon the borrowers’ default. Plaintiffs quickly fell behind in payments and went out of business within two years. A casualty of the flagging print media business, the plaintiffs not only defaulted on the loan but lost their company collateral – the printing facility, inventory, equipment and accounts receivable -, too.

Plaintiffs sued the bank and one of its loan officers for multiple business torts bottomed on the claim that the bank prematurely declared a loan default and dealt with plaintiffs’ in a heavy-handed way.  Plaintiffs appealed the trial court’s entry of summary judgment for the defendants.

Affirming, the First District dove deep into the nature and reach of the breach of fiduciary duty, consumer fraud, and conversion torts under Illinois law.

The court first rejected the plaintiff’s position that it stood in a fiduciary position vis a vis the bank. A breach of fiduciary duty plaintiff must allege (1) the existence of a fiduciary duty on the part of the defendant, (2) defendant’s breach of that duty, and (3) damages proximately resulting from the breach.

A fiduciary relationship can arise as a matter of law (e.g. principal and agent; lawyer-client) or where there is a “special relationship” between the parties (one party exerts influence and superiority over another).  However, a basic debtor-creditor arrangement doesn’t rise to the fiduciary level.

Here, the loan agreement explicitly disclaimed a fiduciary arrangement between the loan parties.  It recited that the parties stood in an arms’ length posture and the bank owed no fiduciary duty to the borrowers.  While another loan section labelled the bank as the borrowers’ “attorney-in-fact,” (a quintessential fiduciary relationship) the Court construed this term narrowly and found it only applied upon the borrower’s default and spoke only to the bank’s duties concerning the disposition of the borrowers’ collateral.  On this point, the Court declined to follow a factually similar Arkansas case (Knox v. Regions Bank, 103 Ark.App. 99 (2008)) which found that a loan’s attorney-in-fact clause did signal a fiduciary relationship.  Knox had no precedential value since Illinois case authorities have consistently held that a debtor-creditor relationship isn’t a fiduciary one as a matter of law. (¶¶ 36-38)

Next, the Court found that there was no fiduciary relationship as a matter of fact.  A plaintiff who tries to establish a fiduciary relationship on this basis must produce evidence that he placed trust and confidence in another to the point that the other gained influence and superiority over the plaintiff.  Key factors pointing to a special relationship fiduciary duty include a disparity in age, business acumen and education, among other factors.

Here, the borrowers argued that the bank stood in a superior bargaining position to them.  The Court rejected this argument.  It noted the plaintiffs were experienced businessmen who had scaled a company from 3 employees to over 350 during a three-decade time span.  This lengthy business success undermined the plaintiffs’ disparity of bargaining power argument

Take-aways:

Kosowski is useful reading for anyone who litigates in the commercial finance arena. The case solidifies the proposition that a basic debtor-creditor (borrower-lender) relationship won’t rise to the level of a fiduciary one as a matter of law. The case also gives clues as to what constitutes a special relationship and what degree of disparity in bargaining power is required to establish a factual fiduciary duty.

Lastly, the case is also instructive on the evidentiary showing a conversion and consumer fraud plaintiff must make to survive summary judgment in the loan default context.

 

Binding LLC to Operating Agreement A Substantive Change in Illinois Law; No Retroactive Effect – IL Court

The summer of 2017 ushered in a slew of changes, to Illinois’ limited liability company statute, 805 ILCS 180/15-1 et seq. (the “Act”).  Some of the key Act amendments included clarifying LLC member rights to access company records, explaining if and when a member or manager’s fiduciary duties can be eliminated or reduced, tweaking the Act’s judgment creditor remedies section, and changing the Act’s conversion (e.g. partnership to LLC or vice versa) and domestication rules.

Q Restaurant Group Holdings, LLC v. Lapidus, 2017 IL App (2d) 170804-U, examines another statutory change – one that binds an LLC to an operating agreement (OA) even where the LLC doesn’t sign it. See 805 ILCS 180/15-5.

The OA is the LLC’s governing document that sets forth each member’s (or manager’s) respective rights and obligations concerning contribution, distribution, voting rights and the like. The OA’s signing parties are typically the LLC members/managers – not the LLC itself.  Legally, this is significant because under privity of contract principles – only a party to a written agreement can sue to enforce it.

2017’s LLC Act changes make it clear that the LLC entity has standing to sue and be sued under the OA regardless of whether or not the LLC signed it.

The plaintiff in Lapidus sued the defendant for various business torts including conversion and tortious interference with contract. The defendant moved to dismiss the suit based on mandatory arbitration language in the OA.  Denying defendant’s Section 2-619 motion, the Court held that since the amended Section 15-5 of the Act worked a substantive change to the former LLC Act section, it didn’t apply retroactively. (The OA in Lapidus preceded the 2017 amendments.)

Rules/reasoning:

Affirming the trial court, the First District examined the dichotomy between procedural and substantive changes to legislation.  Where a statutory amendment is enacted after a lawsuit is filed, the Court looks to whether the legislature specified the reach (i.e. does it apply retroactively?) of the amendment.  Where new legislation is silent on its scope, the Court determines whether a given amendment is procedural or substantive.  If procedural, the amendment has retroactive effect.  If the change is substantive, however, it will only apply prospectively.

A procedural change is one that “prescribes the method of enforcing rights or obtaining redress” such as pleadings, evidence and practice.  A substantive change, by contrast, is one that establishes, creates or defines legal rights.  (¶¶ 15-16; citing to Landgraf v. USI Film Products, 511 U.S. 244, 280 (1994); 5 ILCS 70/4 (Illinois’s Statute on Statutes))

In finding that amended Section 15-5 was a substantive change to Illinois’ LLC Act (and therefore couldn’t be applied retroactively) the court noted the amended statute “established a contractual right” by binding the LLC to an OA it never signed.

Since the plaintiff LLC in Lapidus never signed the OA, the Court couldn’t require the plaintiff to follow the OA’s arbitration clause without substantially altering the LLC’s contract rights.  As a result, the Court held that amended Section 15-5 did not apply to the pre-amendment OA and the plaintiff didn’t have to adhere to the arbitration clause.t have to adhere to the OA’s arbitration provisions. (¶¶ 18-19).

Afterwords:

I. To decide if a statutory amendment applies retroactively (as opposed to only being forward-looking), the court considers whether the change is procedural or substantive.

II. While the distinction between procedural and substantive isn’t always clear, Lapidus stands for proposition a change in the law that alters a parties basic contract rights (such as by making a non-party a party to an operating agreement) is substantive and will only apply in the future.

III.  And though the case is unpublished, Lapidus still makes for interesting reading in light of Illinois’ manifold LLC Act changes.  With so many recent statutory changes (see here_for example), this case likely augurs an uptick in cases interpreting the 2017 LLC Act amendments.

Appeals Court Gives Teeth to “Good Faith” Requirement of Accord and Satisfaction Defense

A common cautionary tale recounted in 1L contracts classes involves the crafty debtor who secretly short-pays a creditor by noting  “payment in full” on his check. According to the classic “gotcha” vignette, the debtor’s devious conduct forever bars the unwitting creditor from suing the debtor.

Whether apocryphal or not (like the one about the newly minted lawyer who accidentally brought weed into the courthouse and forever lost his license after less than 3 hours of practice) the fact pattern neatly illustrates the accord and satisfaction rule.

Accord and satisfaction applies where a creditor and debtor have a legitimate dispute over amounts owed on a note (or other payment document) and the parties agree on an amount (the “accord”) the debtor can pay (the “satisfaction”) to resolve the disputed claim.

Piney Ridge Associates v. Ellington, 2017 IL App (3d) 160764-U reads like a first year contracts “hypo” come to life as it reflects the perils of creditor’s accepting partial payments where the payor recites “payment in full” on a check.

Piney Ridge’s plaintiff note buyer sued the defendant for defaulting on a 1993 promissory note. The defendant moved to dismiss because he wrote “payment in full” under the check endorsement line. The trial court agreed with the defendant that plaintiff’s acceptance of the check was an accord and satisfaction that defeated plaintiff’s suit.

The 3rd District appeals court reversed; it stressed that a debtor’s duplicitous conduct won’t support an accord and satisfaction defense.

Under Illinois law, an accord and satisfaction is a contractual method of discharging a debt: the accord is the parties’ agreement; the satisfaction is the execution of the agreement.

In deciding whether a transaction amounts to an accord and satisfaction, the court focuses on the parties’ intent.

Article 3 of the Uniform Commercial Code (which applies to negotiable instruments) a debtor who relies on the accord and satisfaction defense must prove (1) he/she tendered payment in good faith as full satisfaction of a claim, (2) the amount of the claim was unliquidated or subject to a bona fide dispute; and (3) the claimant obtained payment from the debtor. 810 ILCS 5/3-311(a).

Good faith means honesty in fact and observing “reasonable commercial standards of fair dealing.” The debtor must also provide the creditor with a conspicuous statement that the debtor’s payment is tendered in full satisfaction of a claim. (⁋12)(810 ILCS 5/3-311(a), (b)). Without an honest dispute, there is no accord and satisfaction. (⁋ 14)

A debtor who fails to act in good faith cannot bind a creditor to an accord and satisfaction. Case examples of a court refusing to find an accord and satisfaction include defendants who, despite clearly marking their payment as “in full”, paid less than 10% of a workers’ compensation lien in one case, and in another, paid less than half the plaintiff’s total invoice amount and lied to the plaintiff’s agent about past payments. (⁋⁋ 13, 14)(citing to Fremarek v. John Hancock Mutual Life Ins. Co., 272 Ill.App.3d 1067 (1995); and McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1307 (7th Cir. 1996).

Applying this good faith requirement, the Court noted that the defendant paid $354 to the plaintiff at the time the defendant admittedly owed over $10,000 (defendant sent a pre-suit letter to the prior noteholder conceding he owed $10,000 on the note). The Court held that this approximately $7,600 shortfall clearly did not meet accord and satisfaction’s good faith component.

Bullet-points:

  • Accord and satisfaction requires good faith on the payor’s part and a court won’t validate debtor subterfuge.
  • Where the amount paid “in full” is dwarfed by the uncontested claim amount, the Court won’t find an accord and satisfaction.
  • Where there is no legitimate dispute concerning a debt’s existence and amount, there can be no accord and satisfaction.

 

 

No Automatic Finality Where Pleading Never Amended After ‘Without Prejudice’ Dismissal – IL Court

Richter v. Prairie Farms Dairy, Inc.’s, (2016 IL 119518) essential holding is that a prior dismissal without prejudice doesn’t convert to a final order for res judicata or appeal purposes where a plaintiff fails to amend the dismissed pleading within the time deadline set by the court and the movant defendant doesn’t seek a dismissal with prejudice.

Claiming their membership in an agriculture cooperative was unfairly terminated, the Richter plaintiffs sued the defendant co-op for statutory shareholder remedies under the Illinois Business Corporation Act, 805 ILCS 5/12.56 (BCA), and common law fraud. Plaintiffs’ key theory was that defendant prematurely and pretextually terminated a milk marketing agreement by invoking an obscure bylaws provision in the agreement.

The trial court dismissed plaintiffs’ fraud claims without prejudice and gave them 30 days to amend their complaint – a deadline ultimately increased to 120 days. Plaintiffs never amended their fraud claims though, instead choosing to pursue the BCA claim. After nearly five years of litigation, the plaintiff sought the voluntary dismissal of the BCA claim and later refiled another action within the one-year window allowed by 735 ILCS 5/2-1009.

The trial court granted the defendant’s 2-619 motion to dismiss the refiled suit under res judicata principles. It found the plaintiffs’ failure to amend the fraud claims “finalized” the prior dismissal without prejudice order and barred plaintiffs’ refiled suit.  The Fourth District reversed.  It held the trial court’s dismissal without prejudice was not final on its face and could never support a res judicata finding. Defendant appealed to the Illinois Supreme Court.

Affirming the appeals court, the Supreme Court dove deep into the earmarks of a final judgment for appeal and res judicata purposes and examined when an involuntary dismissal precludes the later refiling of a lawsuit.

Res judicata requires a final judgment on the merits for the doctrine to preclude a second lawsuit between two parties for the same cause of action. The doctrine bars not only what was actually decided in a prior action, but also matters that could have been litigated and decided in that action.

A “final” judgment or order denotes one that terminates the litigation and absolutely fixes the parties’ rights so that all that’s left is enforcing the judgment. (⁋24)
Illinois Supreme Court Rule 273 provides that an involuntary dismissal – other than one for lack of jurisdiction, improper venue, or failure to join an indispensable party – is considered an adjudication on the merits.

A dismissal “without prejudice” signals there was no final decision on the merits. A dismissal that grants a plaintiff leave to amend its pleading is not final because the dismissal does not terminate the litigation. (⁋25). In such a case, a plaintiff is not barred from refiling an action. s

The Illinois Supreme Court declined the defendant’s invitation to create an “automatic final judgment ” rule when a plaintiff fails to amend within court-imposed time limits. Instead, the Court placed the onus on the litigants to convert a non-final dismissal order into a final one by seeking a dismissal with prejudice once the time for amendments has lapsed. And since the defendant had the burden of showing that res judicata applied and failed to obtain a definite with prejudice dismissal of plaintiff’s claims, the plaintiff was not prevented from refiling their lawsuit.

But What About Rein and Hudson?

Rein v. David A. Noyes & Co., 172 Ill.2d 325, 334–35 (1996) and Hudson v. City of Chicago, 228 Ill.2d 462, 467 (2008) are oft-cited case law poster children for the perils of refiling previously (voluntarily) dismissed claims when other claims in the same suit were involuntarily dismissed. In such a case, a plaintiff’s refiled action can be barred by res judicata since the voluntarily dismissed claims could have been litigated in the earlier suit.  But here, unlike in Rein and Hudson, no part of plaintiff’s suit was dismissed with prejudice. And since a nonfinal order can never bar a subsequent action, res judicata didn’t apply.

Implication

When faced with a dismissal without prejudice, a plaintiff should quickly seek leave to amend or seek a dismissal with prejudice to start the notice of appeal clock. For its part, a defendant should seek with- prejudice dismissal language where a plaintiff fails to amend within time limits allowed by the court. Doing so will put the defendant in a good position to file a dismissal motion predicated on res judicata or claim-splitting if the plaintiff later refiles against the same defendant.

Commission Payment Terms in Employment Contract Trump Cable Rep’s ‘Procuring Cause’ Claim in Sales Contract Spat – IL Court

I once represented a client who sued his former employer – an energy company – for unpaid commission and bonuses.  Before he hired me, the client filed a pro se administrative claim with the Illinois Department of Labor (DOL) to recover the monies.  The DOL found in my client’s favor but could not decide on a specific dollar amount. Several months later, I sued to recover under the Illinois Wage Payment and Collection Act (Wage Act) and for breach of contract.  In that case, which settled favorably for us, the employer unsuccessfully argued my client’s prior DOL case precluded our civil Wage Act claim.  The trial court rejected this res judicata argument on the basis that the DOL proceeding was not equivalent to a prior adjudication on the merits.

Borum v. Wideopenwest Illinois, LLC, 2015 IL App (1st) 141482-U, a two-year old, unpublished decision, presents a similar fact pattern and considers whether an ex-employee’s earlier administrative claim prevents a later civil lawsuit against the same employer for the same claim.  The case also spotlights the interplay between an employment agreement’s payment terms and the procuring cause doctrine in a sales commissions dispute.

Defendant hired plaintiff to prospect for cable customers.  It agreed to pay plaintiff a commission based on customers he signed up.  The defendant’s standard employment contract documented the plaintiff’s commission payment rights: plaintiff earned his commission once a customer signed a right-of-entry agreement with the cable supplier.

After lodging an unsuccessful DOL, plaintiff sued the cable company in state court to recover unpaid sales commissions. The trial court granted defendant’s motion to dismiss all counts of the plaintiff’s complaint and plaintiff appealed.

Affirming the trial court’s dismissal, the Court first considered whether the plaintiff’s DOL proceeding barred his civil suit under res judicata or collateral estoppel principles.  Section 14 of the Wage Act authorizes an employee to file either a DOL claim or a civil action, but not both, to recover underpayment damages along with 2% per month of the underpaid amount.

The DOL ruled against the plaintiff.  It found the right-of-entry agreements were not consummated until signed by both a customer and the defendant employer.)

The Court found the DOL hearing was too informal and not “judicial” or “adjudicatory” enough to defeat plaintiff’s later civil suit under the res judicata rule.

Res judicata requires a final judgment on the merits by a court of competent jurisdiction.  Collateral estoppel precludes litigation of an issue previously decided in an earlier proceeding.  Res judicata and collateral estoppel can extend to administrative proceedings that are judicial, adjudicatory or quasi-judicial in nature.

So where administrative proceedings involve sworn testimony, are adversarial in nature and include cross-examination of witnesses, they can bar a subsequent civil suit.

Here, since the DOL conducted only an informal hearing with no cross-examination or sworn witnesses, the DOL had no adjudicatory power over the parties and so its finding for defendant had no preclusive effect against the plaintiff’s lawsuit.

The court also rejected plaintiff’s procuring cause argument.  Designed to soften the harsh impact of at-will contracts, the procuring cause doctrine allows a departed salesperson to recover commissions on sales he/she consummated before his/her employment ends even where the money isn’t paid to the employer until after the salesperson departs.  The procuring cause rule is only a gap filler though: it’s a default rule that only applies where a contract is silent on when commissions are paid.

Since plaintiff’s contract with defendant specifically provided plaintiff would be paid commissions earned during (but not after) the period of the employment, the court found this specific enough to vitiate the procuring cause rule.

Lastly, the Court considered whether defendant violated its handbook which stated compensation terms could only be changed on 30 days advance notice.  Plaintiff argued that the defendant made a unilateral change to its compensation policy without giving plaintiff the requisite notice.

The key question for the Court was whether the employee manual was an enforceable contract. For an employee handbook to vest an employee with binding contract rights, (1) the handbook promise must be clear enough that an employee reasonably believes and offer has been made, (2) the handbook offer must be distributed to the employee so that he/she actually receives it or is aware of its contents; the (3) the employee must accept the offer by commencing work after learning of the policy statement.

Since the plaintiff conceded he wasn’t aware of the employee manual until the day he was fired, the court found he couldn’t reasonably show the handbook provided him with enforceable contract rights. (¶¶ 83-85).

Bullet-points:

  • Administrative claims can support a res judicata defense but only where the administrative hearing is adversarial (judicial) in nature; such as where witnesses give sworn testimony that can be tested on cross-examination;
  • The procuring cause rule won’t trump specific contract payment terms;
  • A written employer policy on compensation adjustments isn’t binding against an employer where the aggrieved employee isn’t aware of the policy until on or after he/she’s fired.

 

 

 

 

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Commercial Borrowers’ Civil RICO Suit For Inflated Appraisals and Loans Bounced by IL Fed Court

 

Delaware Motel Associates v. Capital Crossing Servicing Company, LLC, 2017 WL 4224618 examines the pleading requisites for civil RICO claims and the razor-thin difference between unjust enrichment and quantum meruit claims in a hotel development loan dispute.

The plaintiff real estate investors sued a lender and its appraisal firm for civil RICO violations.  The plaintiffs alleged the appraiser and lender plotted to issue fraudulent loans based on inflated property values over a multi-year span.  The Northern District of Illinois granted Defendants’ motion to dismiss the claims under Rule 12(b)(6).

Reasons:

To state a cognizable RICO claim, a plaintiff must plead (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. To satisfy the enterprise element – item (2) – the plaintiff has to allege “a group of persons acting together for a common purpose or course of conduct.” Here, the plaintiffs’ complaint was devoid of specific allegations that defendants worked together to advance a common objective and lacked any facts showing defendants’ common purpose.

The plaintiffs also failed to adequately allege defendants engaged in racketeering activity. Quintessential RICO conduct includes mail and wire fraud, bank fraud, extortion and money laundering. 18 U.S.C. § 1961(1). Because of their inherently fraudulent make-up, these predicate acts must be pled with acute specificity under Rule 9(b).

To satisfy Rule 9(b)’s heightened pleading standard, the civil RICO plaintiff must allege the time, place, and content of the alleged fraud.  While Federal pleading rules sometimes allow fraud to be pled “on information and belief,” the plaintiff still must supply “some firsthand information to provide grounds to corroborate their suspicions.”  The Court found the plaintiff’s mail, wire and bank fraud allegations sparse since they didn’t identify a specific fraudulent loan or inflated land appraisal.

The Court also dispatched with the plaintiffs’ intentional interference with prospective economic advantage claim.  This requires a plaintiff to allege: (1) he had a reasonable expectancy of a valid business relationship; (2) the defendant knew about the expectancy; (3) the defendant intentionally interfered with the expectancy and prevented it from ripening into a valid business relationship; and (4) the intentional interference injured the plaintiff.

In their Complaint, plaintiffs failed to allege any defendant who knew of plaintiff’s reasonable expectancy of a valid business relationship who purposefully tampered with the expectancy.

Rejecting plaintiffs’ unjust enrichment and quantum meruit claims, the court again focused on plaintiffs’ pleading deficits.  The plaintiffs failed to allege the critical unjust enrichment element that plaintiff conferred a benefit on defendants which they unfairly kept.  The plaintiffs similarly failed to plead quantum meruit as the Complaint was missing allegations that plaintiff performed a service that benefitted defendants.

Useful Bullet-Points

– This case provides a useful pleadings primer for civil RICO cases and emphasizes the paramount importance of factual specificity in fraud-based claims.  To allege a RICO enterprise, the plaintiff must allege concerted actions by a group of people to pursue a common goal.

– A viable racketeering claim sounding in mail or wire fraud requires specific factual allegations.  Otherwise, the RICO claim can be subject to Rule 12(b)(6) dismissal.

 

Marital Privilege Argument Premature in Insurance Broker’s Trade Secrets Case Against Former Agent – IL ND

The district court in Cornerstone Assurance Group v. Harrison discusses the Federal court plausibility standard for pleadings and considers whether Illinois’s marital privilege statute defeats an insurance broker’s trade secrets suit against a former employee.

The defendant signed an employment contract that contained a confidentiality provision covering plaintiff’s financial information, marketing plans, client leads, prospects, and lists along with fee schedules, and computer software.  Plaintiff paid defendant $1,000 not to disclose plaintiff’s confidential information.

The plaintiff alleged the defendant disclosed the information – including a protected client list and private medical data – to her husband, who worked for a competing broker.  The plaintiff alleged the competitor used that information to recruit plaintiff’s employees.  The defendant moved to dismiss the plaintiff’s claims under Rule 12(b)(6).

Trade Secrets Claim

Denying the motion, the court first looked to the pleading requirements of a claim under the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, et seq.To prevail on a claim for misappropriation of a trade secret under the [ITSA], the plaintiff must demonstrate (1) the information at issue was a trade secret, (2) that the information was misappropriated, and (3) that it was used in the defendant’s business.

ITSA defines a trade secret as information, data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that is (1) sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (20 is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. 765 ILCS 1065/2(d)

The law does not confer trade secret status for information “generally known or understood within an industry even if not to the public at large.”  A plaintiff also foregoes trade secret protection where it fails to take affirmative measures to keep others from using the proprietary information.  In addition to these statutory guideposts, Illinois case law considers several additional factors that inform the trade secrets analysis.  These include: (1) the extent to which the information is known outside of the plaintiff s business; (2) the extent to which the information is known by employees and others involved in the plaintiff s business; (3) the extent of measures taken by the plaintiff to guard the secrecy of the information; (4) the value of the information to the plaintiff s business and to its competitors; (5) the amount of time, effort and money expended by the plaintiff in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.  No one factor predominates but the more factors present increases plaintiff’s chances of establishing a trade secret.

The Court held the plaintiff alleged sufficient facts to show that some of the information allegedly misappropriated was a trade secret.  Under Illinois law, a list of actual or potential customers as well as insurance claims data can qualify as a trade secret under certain facts.  The plaintiff’s Complaint allegations that it spent several years developing the confidential data at issue and that it wasn’t accessible to others satisfied the pleading requirements for a valid trade secrets case.

Marital Communications Privilege

The Court held it was too soon to address Defendant’s argument that the marital privilege statute negated Plaintiff’s claims.  The marital privilege attaches to husband and wife communications.  But a spouse’s communication to a third party waives the privilege and a litigant is free to use that communication against its adversary.  The marital privilege also doesn’t extend to subsequent uses of protected communication.  See 735 ILCS 5/8-801 (husband and wife may not testify to communication or admission made by either of them to each other.)

While the court opted to table the privilege issue until after discovery, the Court noted the plaintiff alleged the defendant disclosed trade secrets not only to her husband but to a third party – the husband’s employer. Since the Complaint established it was possible the defendant shared information with someone other than her husband, the marital privilege didn’t bar plaintiff’s claims at the case’s pleading stage.

Afterwords

This case represents a court flexibly applying Rule 12’s plausibility standard in the trade secrets context.  Solidifying the proposition that a plaintiff doesn’t have to plead evidence or try its case at the pleading stage, the Court makes clear that disclosure of a trade secret to even a single competitor can satisfy the misappropriation prong of a trade secrets claim.  Harrison also shows the marital communications privilege won’t apply to information that escapes a husband-wife union.  A complaint’s plausible allegation that protected information went beyond the confines of the marital union nullifies the marital privilege.

Contractual Indemnity Clause May Apply to Direct Action in Bond Offering Snafu; No Joint-Work Copyright Protection for PPM – IL ND

The Plaintiff in UIRC-GSA Holdings, Inc. v. William Blair & Company, 2017 WL 3706625 (N.D.Ill. 2017), sued its investment banker for copyright infringement and professional negligence claiming the banker used the plaintiff’s protected intellectual property – private placement memoranda – to get business from other clients.  The parties previously executed an engagement agreement (“Agreement”) which required the banker to facilitate plaintiff’s purchase of real estate through bond issues.

The banker denied infringing plaintiff’s copyrights and counterclaimed for breach of contract, contractual indemnity and tortious interference with contract.  Plaintiff moved to dismiss all counterclaims.

In partially granting and denying the (12(b)(6)) motion to dismiss the counterclaims, the Northern District examined the pleading elements for joint-author copyright infringement and tortious interference claims and considered the reach of contractual indemnification provisions.

The counterclaiming banker first asserted that it was a joint owner of the private placement documents and sought an accounting of the plaintiff’s profits generated through use of the materials.  Rejecting this argument, the Court stated the Copyright’s definition of a ‘joint work’: “a work prepared by two or more authors with the intention that the authors’ work be merged into inseparable or interdependent parts of a unitary whole.” 17 U.S.C. 101.

To establish co-authorship, the copyright plaintiff must establish (1) an intent to create a joint work, and (2) independently copyrightable contributions to the material.  The intent prong simply means the two (or more) parties intended to work together to create a single product; not that they specifically agreed to be legal co-copyright holders.

To meet the independently copyrightable element (the test’s second prong), the Court noted that “ideas, refinements, and suggestions” are not copyrightable.  Instead, the contributed work must possess a modicum of creativity vital to a work’s end product and commercial viability.

Here, while the counter-plaintiff alleged an intent to create a joint work, it failed to allege any specific contributions to the subject private placement documents.  Without specifying any copyrightable contributions to the documents, the investment firm failed to satisfy the pleading standards for a joint ownership copyright claim.

The court next considered the banker’s indemnification claim – premised on indemnity (one party promises to compensate another for any loss) language in the Agreement. The provision broadly applied to all claims against the counter-plaintiff arising from or relating to the Agreement.  The plaintiff argued that by definition, the indemnity language didn’t apply to direct actions between the parties and only covered third-party claims (claims brought by someone other than plaintiff or defendant).

The Court rejected this argument and found the indemnity language ambiguous.  The discrepancy between the Agreement’s expansive indemnification language in one section and other Agreement sections that spoke to notice requirements and duties to defend made it equally plausible the indemnity clause covered both third-party and first-party/direct actions.  Because of this textual conflict, the Court held it was premature to dismiss the claim without discovery on the parties’ intent.

The court also sustained the banker’s tortious interference counterclaim against plaintiff’s motion to dismiss.  The counter-plaintiff alleged the plaintiff sued and threatened to continue suing one of the counter-plaintiff’s clients (and a competitor of the plaintiff’s) to stop the client from competing with the plaintiff in the bond market.  While the act of filing a lawsuit normally won’t support a tortious interference claim, where a defendant threatens litigation to dissuade someone from doing business with a plaintiff can state a tortious interference claim.

Take-aways:

Contractual indemnity provisions are construed like any other contract.  If the text is clear, it will be enforced as written.  In drafting indemnity clauses, the parties should take pains to clarify whether it applies only to third-party claims or if it also covers direct actions between the parties.  Otherwise, the parties risk having to pay the opposing litigant’s defense fees.

Filing a lawsuit alone, isn’t enough for a tortious interference claim.  However, the threat of litigation to dissuade someone from doing business with another can be sufficient business interference to support such a claim.

Joint ownership in copyrighted materials requires both an intent for joint authorship and copyrightable contributions from each author to merit legal protection.

 

Plaintiff Shows Actual and Constructive Fraud in Fraudulent Transfer Suit – IL Court

The plaintiff mortgage lender in Summitbridge Credit Investments II, LLC v. Ahn, 2017 IL App (1st) 162480-U sued the husband and wife borrower defendants for breach of a mortgage loan on two commercial properties in Chicago

Two days after the plaintiff obtained a $360K-plus default judgment, the defendants deeded a third commercial property they owned to their adult children.

The plaintiff caught wind of the post-judgment transfer during citation proceedings and in 2015 filed a fraudulent transfer suit to undo the property transfer.  The trial court granted summary judgment for the lender and voided the defendants’ transfer of property. The defendants appealed.

Affirming, the First District recited and applied the governing standards for actual fraud (“fraud in fact”) and constructive fraud (“fraud in law”) under Illinois’s fraudulent transfer act, 740 ILCS 160/1 et seq. (the “Act”)

The Act allows claims for two species of fraud under the Act – actual fraud and constructive fraud, premised on Act Sections 5(a)(1) and 5(a)(2) and 6(a), respectively.  (Also, see http://paulporvaznik.com/uniform-fraudulent-transfer-act-actual-fraud-constructive-fraud-transfers-insufficient-value-il-law-basics/5646)

Actual Fraud and ‘Badges’ of Fraud

Actual fraud that impels a court to unwind a transfer of property requires clear and convincing evidence that a debtor made a transfer with actual intent to hinder, delay or defraud creditors.

Eleven badges or indicators of fraud are set forth in Section 5(b) of the Act.  The factor the Summitbridge Court particularly homed in on was whether there was an exchange of reasonably equivalent value.  That is, whether the defendants’ children gave anything in exchange for the transferred commercial property.

In analyzing this factor, courts consider four sub-factors including (1) whether the value of what was transferred is equal to the value of what was received, (2) the fair market value of what was transferred and what was received, (3) whether it was an arm’s length transaction, and (4) good faith of the transferee/recipient.  Reasonably equivalent value is measured at the time of transfer.

In opposing the plaintiff’s summary judgment motion, the defendants made only conclusory assertions they lacked fraudulent intent.  Moreover, they failed to come forward with any evidence showing they received consideration for the transfer.

In summary, because there were so many badges of actual fraud present, and the debtors offered no proof of consideration flowing to them in exchange for quitclaiming the property, the appeals court affirmed the trial court’s actual fraud finding.

Constructive Fraud

Unlike actual fraud, constructive fraud (i.e., fraud in law) does not require proof of an intent to defraud.  A transfer made for less than reasonably equivalent value of the thing transferred that leaves a debtor unable to meet its obligations are presumed fraudulent.  A fraudulent transfer plaintiff alleging constructive fraud must prove it by a preponderance of evidence – a lesser burden that the clear and convincing one governing an actual fraud or fraud in fact claim.

Constructive fraud under Act Section 5(a)(2) is shown where a debtor did not receive a reasonably equivalent value for the transfer and the debtor (a) was engaged or was about to engage in a business or transactions for which the debtor’s remaining assets were unreasonably small in relation to the business or transaction, or (b) intended to incur, or believed or reasonably should have believed he would incur, debts beyond his ability to pay as they came due.

Section 6(a) constructive fraud applies specifically to claims arising before a transfer where a debtor doesn’t receive reasonably equivalent value and was insolvent at the time of or resulting from a transfer.

The First District agreed with the lower court that the plaintiff sufficiently proved defendants’ constructive fraud.  It noted that the plaintiff’s money judgment pre-dated the transfer of the property to defendant’s children and there was no record evidence of the debtors receiving anything in exchange for the transfer.

Take-aways:

Summitbridge provides a useful summary of fraud in fact and fraud in law fraudulent transfer factors in the context of a dispositive motion.

Once again, summary judgment is the ultimate put-up-or-shut-up litigation moment: a party opposing summary judgment must do more than make conclusory assertions in an affidavit.  Instead, he/she must produce specific evidence that reveals a genuine factual dispute.

The defendants’ affidavit testimony that they lacked fraudulent intent and transferred property to their family members for value rang hollow in the face of a lack of tangible evidence in the record to support those statements.

 

 

 

Pontiac GTO Buyer Gets Only Paltry Damage Award Where He Can’t Prove Lost Profits Against Repair Shop – IL Court

Spagnoli v. Collision Centers of America, Inc., 2017 IL App (2d) 160606-U portrays a plaintiff’s Pyrrhic victory in a valuation dispute involving a 1966 Pontiac GTO.  

The plaintiff car enthusiast brought a flurry of tort claims against the repair shop defendant when it allegedly lost the car’s guts after plaintiff bought it on-line.

The trial court directed a verdict for the defendant on the bulk of plaintiff’s claims and awarded the plaintiff only $10,000 on its breach of contract claim – a mere fraction of what the plaintiff sought.

The Court first rejected plaintiff’s lost profits claim based on the amounts he expected to earn through the sale of car once it was repaired.

A plaintiff in a breach of contract action can recover lost profits where (1) it proves the loss with a reasonable degree of certainty; (2) the defendant’s wrongful act resulted in the loss, and (3) the profits were reasonably within the contemplation of the defendant at the time the contract was entered into.

Because lost profits are naturally prospective, they will always be uncertain to some extent and impossible to gauge with mathematical precision.  Still, a plaintiff’s damages evidence must afford a reasonable basis for the computation of damages and the defendant’s breach must be traceable to specific damages sustained by the plaintiff.  Where lost profits result from several causes, the plaintiff must show the defendant’s breach caused a specific (measurable) portion of the lost profits. [¶¶ 17-20]

Agreeing with the trial court, the appeals Court found the plaintiff failed to present sufficient proof of lost profits.  The court noted that the litigants’ competing experts both valued the GTO at $80,000 to $115,000 if fully restored to mint condition.  However, this required the VIN numbers on the vehicle motor and firewall to match and the engine to be intact.  Since the car in question lacked matching VIN numbers and its engine missing, the car could never be restored to a six-figures value range.

The Court also affirmed the directed verdict for defendant on plaintiff’s consumer fraud claim.  To make out  valid Consumer Fraud Act (CFA) claim under the Consumer Fraud Act a plaintiff must prove: (1) a deceptive act or unfair practice occurred, (2) the defendant intended for the plaintiff to rely on the deception, (3) the deception occurred in the course of conduct involving trade or commerce, (4) the plaintiff sustained actual damages, and (5) the damages were proximately cause by the defendant’s deceptive act or unfair conduct. A CFA violation can be based on an innocent or negligent misrepresentation.

Since the plaintiff presented no evidence that the repair shop made a misrepresentation or that defendant intended that plaintiff rely on any misrepresentation, plaintiff did not offer a viable CFA claim.

Bullet-points:

  • A plaintiff in a breach of contract case is the burdened party: it must show that it is more likely than not that the parties entered into an enforceable contract – one that contains an offer, acceptance and consideration – that plaintiff substantially performed its obligations, that defendant breached and that plaintiff suffered money damages flowing from the defendant’s breach.
  • In the context of lost profits damages, this case amply illustrates the evidentiary hurdles faced by a plaintiff.  Not only must the plaintiff prove that the lost profits were within the reasonable contemplation of the parties, he must also establish which profits he lost specifically attributable to the defendant’s conduct.
  • In consumer fraud litigation, the plaintiff typically must prove a defendant’s factual misstatement.  Without evidence of a defendant’s misrepresentation, the plaintiff likely won’t be able to meet its burden of proof on the CFA’s deceptive act or unfair practice element.

Truth Is Defense to Employee Intentional Interference With Contract Suit – IL Court

 

 

The Illinois First District recently discussed the contours of pre-suit discovery requests in cases that implicate fee speech concerns and whether truthful information can ever support an intentional interference with employment claim.

After relocating from another state to take a compliance role with a large bank, the plaintiff in Calabro v. Northern Trust Corporation, 2017 IL App (1st) 163079-U, was fired after only two weeks on the job for failing to disclose his forced removal from a prior compliance position.

When the employer wouldn’t spill the tea on the snitch’s identity, plaintiff sued.  The trial court dismissed plaintiff’s pre-suit discovery petition and plaintiff appealed.

Affirming, the Court construed pre-suit discovery requests under Supreme Court Rule 224 narrowly.  That rule allows a petitioner to discover the identity of someone who may be responsible in damages to petitioner.

To initiate a request for discovery under Rule 224, the petitioner files a verified petition that names as defendant the person(s) from whom discovery is sought and states why discovery (along with a description of the discovery sought) is necessary.  An order granting a Rule 224 petition is limited to allowing the plaintiff to learn the identity of the responsible party or to at least depose him/her.

To show that discovery is necessary, the petitioner must present sufficient allegations of actionable harm to survive a Section 2-615 motion to dismiss.  That is, the petition must state sufficient facts to state a recognized cause of action.

But Rule 224 limits discovery to the identity of someone who may be responsible to the petitioner.  A petitioner cannot use Rule 224 to engage in a “vague and speculative quest to determine whether a cause of action actually exists.”

Here, the petitioner didn’t know what was actually said by the third party respondent. The Court viewed this as a tacit admission the plaintiff didn’t know if he had a valid claim.

The Court then focused on the veracity of the third-party’s statement.  To be actionable, an intentional interference claim requires the supply of false data about a plaintiff.  Accurate and truthful information, no matter how harmful, cannot underlie an intentional interference action. This is because allowing someone to sue on truthful information violates the First Amendment (to the Constitution) and chills free speech.

Truthful statement immunity is also supported by Section 772 of the Restatement (Second) of Torts which immunizes truthful information from contract interference liability.  [(¶¶ 18-19].  And since the plaintiff’s claim was based on true information – that plaintiff was fired from his last job – the prospective interference claim was doomed to fail.

Afterwords:

This case portrays an interesting application of Rule 224 – a device often employed in the personal injury context.  While the rule provides a valuable tool for plaintiffs trying to identify possible defendants, it doesn’t allow a freewheeling “fishing expedition,”  The petitioner must still state a colorable claim.  In this case, the Court viewed the potential for stifling free speech more worrisome than the individual plaintiff’s private contract rights.

 

 

Sole Proprietor’s Mechanics Lien OK Where Lien Recorded in His Own Name (Instead of Business Name) – IL Court

 

While the money damages involved in Gerlick v. Powroznik (2017 IL App (1st) 153424-U) is low, the unpublished case provides some useful bullet points governing construction disputes.  Chief among them include what constitutes substantial performance, the recovery of contractual “extras,” and the standards governing attorney fee awards under Illinois’s mechanics lien statute.

The plaintiff swimming pool installer sued the homeowner defendants when they failed to fully pay for the finished pool.  The homeowners claimed they were justified in short-paying the plaintiff due to drainage and other mechanical problems.

After a bench trial, the court entered judgment for the pool installer for just over $20K and denied his claim for attorneys’ fees under the Act.  Both parties appealed; the plaintiff appealed the denial of attorneys’ fees while the defendants appealed the underlying judgment.

Held: Affirmed

Reasons:

A breach of contract plaintiff in the construction setting must prove it performed in a reasonably workmanlike manner.  In finding the plaintiff sufficiently performed, the Court rejected the homeowners’ argument that plaintiff failed to install two drains.  The Court viewed drain installation as both ancillary to the main thrust of the contract and not feasible with the specific pool model (the King Shallow) furnished by the plaintiff.

The Court also affirmed the trial court’s mechanic’s lien judgment for the contractor.  In Illinois, a mechanics lien claimant must establish (1) a valid contract between the lien claimant and property owner (or an agent of the owner), (2) to furnish labor, services or materials, and (3) the claimant performed or had a valid excuse of non-performance.  (¶ 37)

A contractor doesn’t have to perform flawlessly to avail itself of the mechanics’ lien remedy: all that’s required is he perform the main parts of a contract in a workmanlike manner.  Where a contractor substantially performs, he can enforce his lien up to the amount of work performed with a reduction for the cost of any corrections to his work.

The owners first challenged the plaintiff’s mechanics’ lien as facially defective.  The lien listed plaintiff (his first and last name) as the claimant while the underlying contract identified only the plaintiff’s business name (“Installation Services & Coolestpools.com”) as the contracting party.  The Court viewed this discrepancy as trivial since a sole proprietorship or d/b/a has no legal identity separate from its operating individual.  As a consequence, plaintiff’s use of a fictitious business name was not enough to invalidate the mechanic’s lien.

The Court also affirmed the trial court’s denial of plaintiff’s claim for extra work in the amount of $4,200.  A contractor can recover “extras” to the contract where (1) the extra work performed or materials furnished were outside the scope of the contract, (2) the extras were furnished at owner’s request, (3) the owner, by words or conduct, agreed to compensate the contractor for the extra work, (4) the contractor did not perform the extra work voluntarily, and (5) the extra work was not necessary through the fault of the contractor.

The Court found there was no evidence that the owners asked the plaintiff to perform extra work – including cleaning the pool, inspecting equipment and fixing the pool cover.  As a result, the plaintiff did not meet his burden of proving his entitlement to extras recovery. (¶¶ 39-41).

Lastly, the Court affirmed the trial court’s denial of attorneys’ fees to the plaintiff.  A mechanics’ lien claimant must prove that an owner’s failure to pay is “without just cause or right;” a phrase meaning not “well-grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.” 770 ILCS 60/17(a).  Here, because there was evidence of a good faith dispute concerning the scope and quality of plaintiff’s pool installation, the Court upheld the trial court’s denial of plaintiff’s fee award attempt.

Afterwords:

1/ A contractor doesn’t have to perform perfectly in order to win a breach of contract or mechanics’ lien claim.  So long as he performs in a workmanlike manner and substantially completes the hired-for work, he can recover under both legal theories.

2/ A sole proprietor and his fictitious business entity are one and the same.  Because of this business owner – d/b/a identity, the sole proprietor can list himself as the contractor on a lien form even where the underlying contract lists only his business name.

 

 

Commercial Tenant Fails to Give Proper Notice of Intent to Extend Lease – IL Case Note

Although it’s an unpublished opinion, Sher-Jo, Inc. v. Town and Country Center, Inc., 2017 IL App (5th) 160095-U still serves as a cautionary tale for tenants that fail to hew to lease notice requirements.  The tenant plaintiff under the commercial lease was obligated to serve the defendant landlord with written notice by registered mail of the tenant’s exercise of its option to extend the lease for an additional five-year term.

Instead of mailing notice of its plans to extend the lease, the tenant faxed its notice and verbally told the landlord it was exercising its option to extend.  But the faxed notice didn’t specify the tenant was extending the lease.  It just said that the tenant’s sublessee – a restaurant – was going to extend its sublease for another five years.

The landlord rejected tenant’s attempt to renew the lease on the basis that it didn’t comport with the lease notice rules.  It (landlord) then entered into a lease directly with the restaurant subtenant.  The tenant filed suit for specific performance and a declaratory judgment that it properly and timely exercised the lease extension option.  After the trial court found the tenant successfully notified the landlord of its intention to extend the lease, the landlord appealed.

Held: Reversed.  Tenant’s failure to adhere to Lease notice requirement defeats its attempt to renew the lease.

Rules/Reasons:

A commercial lessee who seeks to exercise an option to extend a lease must strictly comply – not “substantially comply” – with the terms of the option.  And even though a failure to follow an option provision to the letter can have draconian results, rigid adherence to option requirements promotes commercial certainty.

Here, the tenant’s faxed notice only mentioned that it wished to extend the sublease with the restaurant.  The notice was silent about extending the master lease.

The Court rejected the tenant’s argument that a lease amendment modified the option notice provision in the main lease.  This was because while the amendment did reference the tenant’s option to extend the lease for an additional five-year term, it left untouched the master lease’s requirement that the tenant notify the landlord by certified mail of its intent to exercise the option.

Afterwords:

1/ In the commercial lease milieu, strict compliance with notice provisions is essential.  Although this case works a harsh result on the tenant/sub-lessor, the Court viewed fostering certainty in business transactions as more important than relieving a tenant who substantially, but not strictly, adhered to a lease notice requirement;

2/ Parties to a commercial lease should take pains to comply with notice provisions of a lease.  Otherwise, they run the risk of a court finding they failed to satisfy a precondition to extending a lease.

Fraudulent Transfer Action Can Be Brought In Post-Judgment Proceedings – No Separate Lawsuit Required – IL Court

Despite its vintage (over two decades), Kennedy v. Four Boys Labor Service, 664 N.E.2d 1088 (2nd Dist.  1996), is still relevant and instructional for its detailed discussion of Illinois’ fraudulent transfer statute and what post-judgment claims do and don’t fall within a supplementary proceeding to collect a judgment in Illinois.

The plaintiff won a $70K breach of contract judgment against his former employer and issued citations to discover assets to collect the judgment.

While plaintiff’s lawsuit was pending, the employer transferred its assets to another entity that had some of the same shareholders as the employer.  The “new” entity did business under the same name (Four Boys Labor Service) as the predecessor.

Plaintiff obtained an $82K judgment against the corporate officer who engineered the employer’s asset sale and the officer appealed.

Held: Judgment for plaintiff affirmed

Rules/reasons:

The Court applied several principles in rejecting the corporate officer’s main argument that a fraudulent transfer suit had to be filed in a separate action and couldn’t be brought within the context of the post-judgment proceeding.  Chief among them:

– Supplementary proceedings can only be initiated after a judgment has entered;

– The purpose of supplementary proceedings is to assist a creditor in discovering assets of the judgment debtor to apply to the judgment;

– Once a creditor discovers assets belonging to a judgment debtor in the hands of a third party, the court can order that third party to deliver up those assets to    satisfy the judgment;

– A court can authorize a creditor to maintain an action against any person or corporation that owes money to the judgment debtor, for recovery of the debt (See 735 ILCS 5/2-1402(c)(6);

– A corporate director who dissolves a company without providing proper notice to known creditors can be held personally liable for corporate debts (805 ILCS 5/8.65, 12.75);

– An action to impose personal liability on a corporate director who fails to give notice of dissolution must be filed as a separate lawsuit and cannot be brought in a post-judgment/supplementary proceeding;

– Where a third party transfers assets of a corporate debtor for consideration and with full knowledge of a creditor’s claim, the creditor may treat the proceeds from the sale of the assets as debtor’s property and recover them under Code Section 2-1402;

– A transfer of assets from one entity to another generally does not make the transferee liable for the transferor’s debts;

– But where the transferee company is a “mere continuation” of the selling entity, the transferee can be held responsible for the seller’s debt.  The key inquiry in determining successor liability under the mere continuation framework is whether there is continuity of shareholder or directors from the first entity to the second one;

– An action brought under the Uniform Fraudulent Transfer Act (FTA), 740 ILCS 160/1, is considered one that directly concerns the assets of the judgment debtor and imposes liability on the recipient/transferee based on the value of the transferred assets;

– A transfer is not voidable against one who takes in good faith and provides reasonably equivalent value.  740 ILCS 160/9;

– A court has discretion to sanction a party that disobeys a court order including by entering a money judgment against the offending party;

(664 N.E.2d at 1091-1093)

Applying these rules, the Court found that plaintiff could properly pursue its FTA claim within the supplementary proceeding and didn’t have to file a separate lawsuit.  This is because an FTA claim does not affix personal liability for a corporate debt (like in a corporate veil piercing or alter ego setting) but instead tries to avoid or undo a transfer and claw back the assets actually transferred.

FTA Section 160/5 sets forth eleven (11) factors that can point to a debtor’s actual intent to hinder, delay or defraud a creditor.   Some of the factors or “badges” of fraud that applied here included the transfer was made to corporate insiders, the failure to inform the plaintiff creditor of the transfer of the defendant’s assets, the transfer occurred after plaintiff filed suit, the transfer rendered defendant insolvent, and all of the defendant’s assets were transferred.  Taken together, this was enough evidence to support the trial court’s summary judgment for the plaintiff on his FTA count.

Take-away: Kennedy’s value lies in its stark lesson that commercial litigators should leave no financial stones unturned when trying to collect judgments.  Kennedy also clarifies that fraudulent transfer actions – where the creditor is trying to undo a transfer to a third party and not hold an individual liable for a corporate debt can be brought within the confines of a supplementary proceeding.

 

Lender Lambasted for Loaning Funds to Judgment Debtor’s Related Business – IL Court

The issue on appeal in National Life Real Estate Holdings, LLC v. Scarlato, 2017 IL App (1st) 161943 was whether a judgment creditor could reach loan proceeds flowing from a lender to a judgment debtor’s associated business entity where the debtor himself lacked access to the proceeds.

Answering “yes,” the Court considered some of Illinois post-judgment law’s philosophical foundations and the scope and mechanics of third-party judgment enforcement practice.

The plaintiff obtained a 2012 money judgment of over $3.4M against the debtor and two LLC’s managed by the debtor.   During supplementary proceedings, the plaintiff learned that International Bank of Chicago (“IBC”) loaned $3.5M to two other LLC’s associated with the debtor after plaintiff served a third-party citation on IBC.  The purpose of the loan was to pay for construction improvements on debtor’s industrial property.  And while the debtor wasn’t a payee of the loan, he did sign the relevant loan documents and loan disbursement request.

Plaintiff moved for judgment against IBC in the unpaid judgment amount for violating the third-party citation.  The trial court denied the motion and sided with IBC; it held that since the loan funds were paid to entities other than the debtor, the loan moneys did not belong to the debtor under Code Section 2-1402(f)(1) – the section that prevents a third party from disposing of debtor property in its possession until further order of court.  735 ILCS 5/2-1402(f)(1).

The Plaintiff appealed.  It argued that the debtor sufficiently controlled IBC’s construction loan and the proceeds were effectively, debtor’s property and subject to Plaintiff’s third-party citation.

Reversing, the First District rejected IBC’s two key arguments: first, that the loan proceeds did not belong to the debtor and so were beyond the reach of the third-party citation and second, IBC had set-off rights to the loan proceeds (assuming the funds did belong to debtor) and could set-off the $3.5M loan against debtor’ outstanding, other loan debt.

On the question of whether the post-citation loan was debtor’s property, the Court wrote:

  • Once a citation is served, it becomes a lien for the judgment or balance due on the judgment. Section 2-1402(m);
  • A judgment creditor can have judgment entered against a third party who violates the citation restraining provision by dissipating debtor property or disposing of any moneys belonging to the debtor Section 2-1402(f)(1);
  • Section 2-1402’s purpose is to enable a judgment debtor or third party from frustrating a creditor before that creditor has a chance to reach assets in the debtor’s or third party’s possession. Courts apply supplemental proceedings rules broadly to prevent artful debtors from drafting loan documents in such a way that they elude a citation’s grasp.
  • The only relevant inquiries in supplementary proceedings are (1) whether the judgment debtor is in possession of assets that should be applied to satisfy the judgment, or (2) whether a third party is holding assets of the judgment debtor that should be applied to satisfy the judgment.
  • Section 2-1402 is construed liberally and is the product of a legislative intent to broadly define “property” and whether property “belong[s] to a judgment debtor or to which he or she may be entitled” is an “open-ended” inquiry. (¶¶ 35-36)

The ‘Badges’ of Debtors Control Over the Post-Citation Loan and Case Precedent

In finding the debtor exercised enough control over the IBC loan to subject it to the third-party citation, the Court focused on: (i) the debtor signed the main loan documents including the note, an assignment, the disbursement request and authorization, (ii) the loan funds passed through the bank accounts of two LLC’s of which debtor was a managing member, and (iii) the debtor had sole authority to request advances from IBC.

While conceding the loan funds did end up going to pay for completed construction work and not to the debtor, the Court still believed IBC tried to “game” plaintiff’s citation by making a multi-million dollar loan to businesses allied with the debtor even though the loans never funneled directly to the debtor.

Noting a dearth of Illinois state court case law on the subject, the Court cited with approval the Seventh Circuit’s holding in U.S. v. Kristofic, 847 F.2d 1295 (7th Cir. 1988), a criminal embezzlement case.  There, the appeals court squarely held that loan proceeds do not remain the lender’s property and that a borrower is not a lender’s trustee vis a vis the funds.  Applying the same logic here, the First District found that the loan proceeds were not IBC’s property but were instead, the debtor’s.  Because of this, the loan was subject to the plaintiff’s citation lien.

The Court bolstered its holding with policy arguments.  It opined that if judgment debtors could enter into loan agreements with third parties (like IBC) that restrict a debtor’s access to the loan yet still give a debtor power to direct the loan’s disbursement, it would allow industrious debtors to avoid a judgment. (¶ 39)

The Court also rejected IBC’s set-off argument – that set-off language in other loan documents allowed it to apply the challenged $3.5 loan amount against other loan indebtedness.  Noting that IBC didn’t try to set-off debtor’s other loan obligations with the loan under attack until after it was served with the citation and after the plaintiff filed its motion for judgment, the Court found that IBC forfeited its set-off rights.

In dissent, Judge Mikva wrote that since IBC’s loan was earmarked for a specific purpose and to specific payees, the debtor didn’t have enough control over the loan for it to belong to the debtor within the meaning of Section 2-1402.

The dissent also applied Illinois’s collection law axiom that a judgment creditor has no greater rights in an asset than does the judgment debtor.  Since the debtor here could not access the IBC loan proceeds (again, they were earmarked for specific purpose and payable to business entities – not the debtor individually), the plaintiff creditor couldn’t either.  And since the debtor lacked legal access rights to the loan proceeds, they were not property belonging to him under Section 2-1402 and IBC’s loan distribution did not violate the citation. (¶¶ 55-56)

Afterwords

A big victory for creditor’s counsel.   The Court broadly construes “property under a debtor’s control” in the context of a third-party citation under Section 2-1402 and harshly scrutinized a lender’s artful attempts to dodge a citation.

The case reaffirms that loan proceeds don’t remain the lender’s property and that a borrower doesn’t hold loan proceeds in trust for the lender.

The case also makes clear that where loan proceeds are paid to someone other than the debtor, the Court may still find the debtor has enough dominion over funds to subject them to the citation restraining provisions if there are enough earmarks of debtor control over the funds

Finally, in the context of lender set-off rights, Scarlato cautions a lender to timely assert its set-off rights against a defaulting borrower or else it runs the risk of forfeiting its set-off rights against a competing judgment creditor.

 

Promissory Fraud: Sporting Goods Maker Pleads Seller’s Scheme to Defraud – IL ND

Maurice Sporting Goods, Inc. v. BB Holdings, Inc., 2017 WL 2692124, ponders the reach of the promissory fraud rule (a broken promise normally doesn’t equal fraud), how to plead around it, and the law of the case doctrine.

After a multi-year business relationship for the sale of sporting goods imploded, the plaintiff distributor sued the defendant manufacturer for breach of a 2015 buy-back agreement that required the manufacturer to “buy back” unsold inventory.

The manufacturer counterclaimed; it claimed the distributor defrauded it and tampered with the manufacturer’s relationship with a key customer.  Partially granting the plaintiff’s motion to dismiss the counterclaims, the Northern District discussed the factual specificity required of a plaintiff to circumvent the general rule that promissory fraud isn’t actionable.

The Court first addressed the distributor’s law of the case argument – the manufacturer was trying to relitigate its earlier failed estoppel defense (that the distributor’s fraud barred it from recovering damages from the manufacturer).  The court previously nixed the manufacturer’s estoppel defense because it failed to link the plaintiff’s fraud to the buy-back agreement.

The law of the case doctrine (LOC) prevents a court from reopening issues it previously decided in the same case.  LOC is a flexible doctrine, though.  A court will refuse to apply LOC if there is a change in the law, new evidence or compelling circumstances.

The court declined to apply the LOC doctrine here because the manufacturer’s stricken estoppel defense was premised on fraud by the plaintiff distributor related to a separate transaction – the original distributor agreement – that differed from the buy-back agreement that underlay plaintiff’s suit.

Next, the court examined whether defendant sufficiently alleged an exception to promissory fraud under Federal pleading rules.  Rule 9(b) of the Federal Rules of Civil Procedure requires heightened factual specificity in fraud claims as the Rule tries to discourage litigants from bootstrapping simple breach of contract claims into tort actions with wide-ranging damages.

Promissory fraud is a false representation of intent concerning future conduct where there is no actual intent to do so.  While promissory fraud is generally not actionable, a plaintiff can plead around it by alleging egregious conduct or a pattern of deception or enticements that reasonably induce reliance.  A fraudulent scheme exists where a party alleges a specific and objective pattern of deception including the who, what, where, and when of the misstatements.

Here, the manufacturer was able to point to three different agents of the distributor who made misstatements in three different phone calls in the same month to support the fraud counterclaim.  These allegations that three distributor employees made false promises in order to sabotage defendant’s relationship with a major retailer were definite enough to meet Rule 9’s pleading requirements for fraud.

Afterwords:

While there is some elemental overlap between an estoppel defense and a promissory fraud counterclaim, the defeat of one won’t always cancel out the other where they relate to different transactions and different underlying facts.

To allege actionable fraud based on a broken promise, a plaintiff must plead a scheme to defraud that equates to a measurable pattern of deception or factual misrepresentations.

LinkedIn Connection Requests Don’t Violate Insurance Salesman’s Noncompete – IL Court

The First District recently considered whether an insurance salesman’s generic LinkedIn invites to some former co-workers violated non-compete provisions in his employment contract.

The plaintiff in Bankers Life v. American Senior Benefits employed the defendant for over a decade as a sales manager.  During his employment, plaintiff signed an employment agreement that contained a 24-month noncompete term that covered a specific geographic area (Rhode Island).  Plaintiff sued when it learned the defendant sent some LinkedIn connection requests to some former colleagues.

The court granted the defendant’s summary judgment motion on the basis that the plaintiff failed to offer any evidence that the defendant breached the noncompete by trying to induce three of plaintiff’s employees to join defendant’s new agency.  Plaintiff appealed.

Plaintiff argued that the LinkedIn requests were veiled, if not blatant, attempts to circumvent the noncompete by inviting former co-workers to join a competitor.

The First District affirmed summary judgment for the defendant.  For support, it looked to cases in other jurisdictions that considered if social media overtures can violate employee restrictive covenants.  The Court noted that a majority of these cases hold that passive social media postings (LinkedIn and Facebook, mainly) don’t go far enough to violate a noncompete.

The cases that have found that social media breached noncompete obligations involve clear statements of solicitation by the departed employee where he directly tries to sign up a former client or colleague. Since all the defendant did in this case was send generic LinkedIn messages, they didn’t rise to the level of an actionable solicitation.

The Court also rejected the plaintiff’s argument that summary judgment was premature and that the plaintiff should have the opportunity to take more discovery on this issue.  Illinois Rule 191 allows a summary judgment opponent to stave off judgment while it takes written and oral discovery to assemble evidence to oppose the motion.  But the plaintiff must show a “minimum level of information” showing a defendant is possibly liable before initiating a lawsuit or making a defendant submit to discovery requests.

Since the plaintiff failed to produce any evidence the defendant solicited any of plaintiff’s employees in the prohibited Rhode Island area, summary judgment for the defendant was proper.

Afterwords:

LinkedIn generic invites that don’t specifically ask someone to sever his/her relationship with current employer don’t go far enough to constitute improper solicitation;

Summary judgment is “put up or shut up moment;” the party opposing summary judgment must offer evidence that raises a question of material fact that can only be decided after a trial on the merits.

 

Florida Series III: Parent Company’s Merger Doesn’t Impact Subsidiary’s Noncompete with M.D.

Collier HMA v. Menichello a medical noncompete dispute, considers whether a third party can enforce a noncompete after a merger.  Jettisoning the “changed corporate culture and mode of operation” test, the Florida appeals court applied basic principles of corporate law to determine whether a parent company’s merger necessarily meant its subsidiary merged too and couldn’t enforce a noncompete involving one of its staff doctors.

Halfway through a three-year employment contract between the plaintiff and doctor defendant, the plaintiff’s corporate parent was acquired by another entity.  The plaintiff-doctor employment contract contained a 12-month noncompete and specifically said it was not enforceable by third parties, successors or assignees of the parties.

After the acquisition, the doctor defendant quit and went to work for one of plaintiff’s competitors.  The plaintiff sued the doctor for violating the 12-month noncompete. The doctor defended by stating that the parent company’s merger with another entity made the plaintiff a successor under the law that could not enforce the restrictive covenant.  The trial court agreed and entered summary judgment for the doctor.  The employer appealed.

Held: Reversed.  Plaintiff employer can enforce the doctor’s noncompete.

Reasons:

Under Florida law, S. 542.335(1)(f), Florida Statutes (2012),  an employment contractual provision that authorizes a third-party beneficiary, assignee or successor to enforce a restrictive covenant is valid.

The statute is silent on the meaning of “successor” but case law defines it to mean “a corporation that, through amalgamation, consolidation or other assumption of interests, is vested with the rights and duties of an earlier corporation.”

Here, the plaintiff employer’s status did not change after its parent company’s merger.  Under the law, a parent corporation is a separate and distinct legal entity from its wholly-owned subsidiary.  As a corollary, a parent company cannot exercise rights of its subsidiary.

The subsidiary plaintiff here continued its existence after the merger as the same single member LLC and didn’t sell or transfer its assets to another entity.  Any change in company ownership several tiers up the corporate chain simply didn’t impact the doctor’s employment contract since plaintiff continued to operate and to employ the doctor.  As the lone signer of the employment contract that contained the noncompete, plaintiff could enforce it.

Afterwords:

The Court refused to apply the nebulous “culture and mode of operation” test which looks to the parties’ post-merger conduct (i.e., did the parties act as though the acquiring company was dictating the acquired company subsidiary’s actions?) to decide whether a third-party can enforce a noncompete.  Instead, the Court considered whether the plaintiff continued its operations (it did) in the wake of the parent company’s merger.

Under black-letter corporate law principles, the Court found that the plaintiff’s parent company’s merger had no impact on the plaintiff as “no other entity emerged from the transaction as a successor to [plaintiff].”  Summary judgment for the plaintiff reversed.

 

Florida Series II: RE Broker Can Assert Ownership Interest in Retained Deposits in Priority Dispute with Condo Developer’s Lenders

Plaza Tower v. 300 South Duval Associates, LLC considers whether a real estate broker or a lender has “first dibs” on earnest money deposits held by a property developer.  After nearly 80% of planned condominium units failed to close (no doubt a casualty of the 2008 crash), the developer was left holding $2.4M of nonrefundable earnest money deposits.  The exclusive listing agreement (“Listing Agreement”) between the developer and the broker plaintiff provided the broker was entitled to 1/3 of retained deposits in the event the units failed to close.

After the developer transferred the deposits to the lender, the broker sued the lender (but not the developer for some reason) asserting claims for conversion and unjust enrichment.

The trial court granted the lenders’ summary judgment motion.  It found that the lenders had a prior security interest in the retained deposits and the broker was at most, a general unsecured creditor of the developer.  The broker appealed.

The issue on appeal was whether the broker could assert an ownership interest in the retained deposits such that it could state a conversion claim against the lenders.

The Court’s key holding was that the developer’s retained deposits comprised an identifiable fund that could underlie a conversion claim.  Two contract sections combined to inform the Court’s ruling.

One contract section provided that the broker’s commission would be “equal to one-third of the amount of the retained deposits.”  The Court viewed this as too non-specific since it didn’t earmark a particular fund.

But another contract section did identify a particular fund; it stated that commission advances to the broker would be offset against commissions paid from the retained deposits.  As a result, the retained deposits were particular enough to sustain a conversion action.  Summary judgment for the developer reversed.

Afterwords: Where a contract provides that a nonbreaching party has rights in a specific, identifiable fund, that party can assert ownership rights to the fund.  Absent a particular fund and resulting ownership rights in them, a plaintiff’s conversion claim for theft or dissipation of the fund will fail.

 

Paul Versus the Rapper: How YouTube Tutorials and Creative Lawyering Played Key Roles in Recovering Judgment Against Elusive Defendant

In almost two decades of practicing in the post-judgment arena, My clients and I have run the emotional gamut from near-intoxicating highs (the “unicorn” fact patterns where the debtor pays up immediately or, even better, the debtor forgets to empty his bank account and when we freeze it, there’s more than enough funds to satisfy the judgment) to disappointment (when the debtor files bankruptcy and there is a long line of prior creditors) to abject frustration (the debtor appears to have no physical ties anywhere yet profusely broadcasts his life of luxury on all social media channels – think Instagram selfie in tropical locale) to the unnerving (a debtor or two have threatened bodily harm).

But occasionally, I’m faced with a fact pattern that requires both tenacity (they all do) and creative collection efforts. Here’s an example of a recent case that fell into this category. The facts are simple: the debtor – a well-known rapper – failed to show for a scheduled concert in another state and gave no notice. The club promoter filed suit in that state and ultimately got a money judgment for his deposit along with some incidental expenses and attorneys fees.

After I registered the judgment here in Illinois, I began hitting snags in rapid succession. I quickly realized this debtor didn’t fit the normal template: meaning, he didn’t have an official job from which he received regularly scheduled payments, had no bank account and owned no real estate. While the debtor’s social media pages were replete with concert videos and robust YouTube channel offerings, the debtor seemed a ghost.

Add to that, the debtor and his record company used UPS stores as its corporate registered office and the debtor’s entourage ran interference and covered for him at every turn.

Here’s what I did:

(1) Source of Funds: Concerts and Merchandise

I looked at the debtor’s website and social media pages to determine where he would be performing over the next several weeks. Then, I researched the business entities that owned the concert venues and prepared subpoenas to them. For the out-of-state venues, I lined up attorneys there to (1) register the Illinois registration of the foreign judgment, and (2) subpoena the venue owners for contracts with the debtor so I could see what percentage of the “gate” would flow to debtor. My plan was to eventually seek the turnover of funds funneling from venue – to management company – to debtor.

On another front, I tried to identify who was in charge of the debtor’s T-shirt and merchandise sales. Since the website was vague on this, I requested this information from the debtor’s management company through an omnibus citation Rider.

(2) Creating Buzz and a Discovery Dragnet: Getting Others Involved

I then served citations to discover assets on debtor’s management company and booking agent. (I was able to locate these companies through the debtor’s social media pages.) This allowed me to cast a wide net and involve third parties whom I surmised the debtor wasn’t keen on getting dragged into this.

From the management company and booking agent, I sought documents showing payments to the debtor including licensing and royalty fees, tax returns, pay stubs, bank records and any other documents reflecting company-to-debtor payments over the past 12 months.

(3) Licensing and Royalties: Zeroing In On Industry Behemoths

In reviewing the management company’s subpoena response, I noted the debtor was receiving regular royalty payments from ASCAP – the national clearinghouse that distributes public performance royalties to songwriters. Based in New York, ASCAP likely wasn’t going to respond to an Illinois subpoena. So I would have to register the judgment in New York. I lined up a New York attorney to do this and notified debtor’s counsel (by this time, debtor, management company and booking agent hired a lawyer) of my plans to register the judgment in NY and subpoena ASCAP for royalty data. They didn’t like that.

Sensing I may be onto something with the ASCAP angle, I dove deep into the byzantine (to me, at least) world of music licensing law. I learned that while ASCAP (BMI is another public performance royalty conduit) handles performance rights licensing, the pre-eminent agent for “mechanical” licenses (licenses that allow you to put music in CD, record, cassette and digital formats) is the Harry Fox Agency, Inc. or HFA – also based in New York. Maybe I shouldn’t admit this but I found YouTube a treasure trove of music licensing law building blocks.

Armed with my published and video licensing law research, I alerted debtor’s counsel of my plans to subpoena HFA for mechanical royalties in lockstep with my ASCAP subpoena once I registered the judgment in New York.

(4) Settlement: Persistence Pays Off

The combined threat of liening the debtor’s concert and merchandise monies and subpoenaing his public performance and mechanical license royalties was enough to motivate debtor to finally – after months of fighting – come to the table with an acceptable settlement offer. While another creditor beat me to the punch and got to the concert venue owners first, our aggressive actions planted enough of a psychological seed in the debtor that his royalties might be imperiled. This proved critical in getting the debtor’s management company (again, without their involvement, this never would settle) to pay almost the whole judgment amount.

Afterwords: My Younger Self May Have Given Up

This case cemented the lesson I’ve learned repeatedly through the years that as a judgment creditor, you have to be persistent, aggressive and creative – particularly with judgment debtors that don’t neatly fit the 9-to-5-salaried-employee paradigm.

Through persistence, out-of-the-box thinking, internet research and wide use of social media, my client got almost all of its judgment under circumstances where the “old me” (i.e. my less experienced self) may have folded.

 

 

British Firm’s Multi-Million Dollar Trade Secrets Verdict Upheld Against Illinois Construction Equipment Juggernaut – IL Fed Court

Refusing to set aside a $73-plus million jury verdict for a small British equipment manufacturer against construction giant Caterpillar, Inc., a Federal court recently examined the contours of the Illinois trade secrets statute and the scope of damages for trade secrets violations.

The plaintiff in Miller UK, Ltd. v. Caterpillar, Inc., 2017 WL 1196963 (N.D.Ill. 2017) manufactured a coupler device that streamlined the earthmoving and excavation process.  Plaintiff’s predecessor and Caterpillar entered into a 1999 supply contract where plaintiff furnished the coupler to Caterpillar who would, in turn, sell it under its own name through a network of dealers.

The plaintiff sued when Caterpillar terminated the agreement and began marketing its own coupler – the Center-Lock – which bore an uncanny resemblance to plaintiff’s coupler design.

After a multi-week trial, the jury found for the plaintiff on its trade secrets claim and for Caterpillar’s on its defamation counterclaim for $1 million – a paltry sum dwarfed by the plaintiff’s outsized damages verdict.

The Court first assessed whether the plaintiff’s three-dimensional computerized drawings deserved trade secrets protection.

The Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, defines a trade secret as encompassing information, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers that (1) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

Misappropriation means “disclosure” or “use” of a trade secret by someone who lacks express or implied consent to do so and where he/she knows or should know that knowledge of the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use.  Intentional conduct, howver, isn’t required: misappropriation can result from a defendant’s negligent or unintentional conduct.

Recoverable trade secret damages include actual loss caused by the misappropriation and unjust enrichment enjoyed by the misappropriator.  Where willful and malicious conduct is shown, the plaintiff can also recover punitive damages.  765 ILCS 1065/4.

In agreeing that the plaintiff’s coupler drawings were trade secrets, the Court noted plaintiff’s expansive use of confidentiality agreements when they furnished the drawings to Caterpillar and credited plaintiff’s trial testimony that the parties’ expectation was for the drawings to be kept secret.

The Court also upheld its trial rulings excluding certain evidence offered by Caterpillar.  One item of evidence rejected by the court as hearsay was a slide presentation prepared by Caterpillar to show how its coupler differed from plaintiff’s and didn’t utilize plaintiff’s confidential data.

Hearsay prevents a litigant from using out-of-court statements to prove the truth of the matter asserted.  An exception to the hearsay rule applies where an out-of-court statement (1) is consistent with a declarant’s trial testimony, (2) the party offering the statement did so to rebut an express or implied charge of recent fabrication or improper motive against the declarant, (3) the statement was made before the declarant had a motive for fabrication, and (4) the declarant testifies at trial and is subject to cross-examination.

Since the slide show was made as a direct response to plaintiff’s claim that Caterpillar used plaintiff’s confidential information, the statement (the slide show) was made after Caterpillar had a motive to fabricate the slide show.

The Court then affirmed the jury’s $1M verdict on Caterpillar’s defamation counter-claim based on plaintiff’s falsely implying that Caterpillar’s coupler failed standard safety tests in written and video submissions sent to Caterpillar’s equipment dealers.  The plaintiff’s letter and enclosed DVD showed a Caterpillar coupler bucket breaking apart and decapitating a life-size dummy. (Ouch!)  The obvious implication being that Caterpillar’s coupler is unsafe.

The Court agreed with the jury that the plaintiff’s conduct was actionable as per se defamation.  A quintessential defamation per se action is one alleging a plaintiff’s lack of ability or integrity in one’s business.  With per se defamation, damages are presumed – meaning, the plaintiff doesn’t have to prove mathematical (actual) monetary loss.

Instead, all that’s required is the damages assessed “not be considered substantial.”  Looking to an earlier case where the court awarded $1M for defamatory statements in tobacco litigation, the Court found that the jury’s verdict against the plaintiff coupler maker here was proper.

Afterwords:

The wide use of confidentiality agreements and evidence of oral pledges of secrecy can serve as sufficient evidence of an item’s confidential nature for purposes of trade secrets liability.  Trade secrets damages can include actual profits lost by a plaintiff, the amount the defendant (the party misappropriating the trade secrets) was unjustly enriched through the use of plaintiff’s trade secrets and, in some egregious cases, punitive damages.

The case also shows that a jury has wide latitude to fashion general damage awards in per se defamation suits.  This is especially so in cases involving deep-pocketed defendants.

 

Random Florida-to-Illinois Texts, Emails and Phone Calls Not Enough to Subject Fla. LLC to IL Jurisdiction

In McGlasson v. BYB Extreme Fighting Series, LLC, 2017 WL 2193235 (C.D.Ill. 2017), the plaintiff sued a Florida LLC and two Florida residents for pilfering the plaintiff’s idea to host MMA fights on cruise ships off the coast of Florida.

Plaintiff claimed that after he sent a rough video of the concept to them, the defendants hijacked the concept and then formed their own MMA-at-sea event, causing the plaintiff monetary damages.

All defendants moved to dismiss the plaintiff’s claims on the basis that they weren’t subject to Illinois jurisdiction.

The Court granted defendants’ motion to dismiss and in doing so, discussed the requisite contacts for an Illinois court to exercise jurisdiction over an out-of-state defendant who commits an intentional tort.

In breach of contract actions, personal jurisdiction turns on whether a defendant purposefully avails itself or the privilege of doing business in the forum state. With an intentional tort defendant, by contrast, the court looks at whether a defendant “purposefully directed” his conduct at the forum state.

Purposely directing activity at a state requires a finding of (1) intentional conduct, (2) expressly aimed at the forum state, with (3) defendant’s knowledge the effects would be felt in the forum state.  If plaintiff makes all three showings, he establishes that a defendant purposefully directed its activity at the forum state.

A plaintiff in an intentional tort case cannot, however, rely on his own unilateral activity to support jurisdiction over a defendant.  Similarly, a defendant’s contact with a third party with no connection to a forum state isn’t relevant to the jurisdictional analysis.

Here, the lone Illinois contacts alleged of defendants were a handful of emails, phone calls and text messages sent to the Illinois resident plaintiff.  To strengthen his case for jurisdiction over the Florida defendants, plaintiff alleged he suffered an economic injury in Illinois.

Rejecting plaintiff’s argument, the court viewed e-mail as not existing “in any location at all:”  instead, it bounces from server to server and the connection between where an e-mail is opened and where a lawsuit is filed is too weak a link to subject an out-of-state sender to jurisdiction in a foreign state.

The Court also noted that (a plaintiff’s) suffering economic injury in Illinois isn’t enough, standing alone, to confer personal jurisdiction over a foreign resident.  The focus is instead whether the defendant’s conduct “connects him to [Illinois] in a meaningful way.”

Since plaintiff’s MMA-at-sea idea had no connection to Illinois and the defendant’s sporadic phone calls, emails and texts weren’t enough to tie him to Illinois, the Court lacked personal jurisdiction over the Florida defendants.

Take-aways:

1/ In intentional tort setting, a foreign defendant’s conduct must be purposefully directed at a forum state for that state to exercise personal jurisdiction over the defendant;

2/ plaintiff’s unilateral actions vis a vis an out-of-state defendant don’t factor into the jurisdictional calculus;

3/ A defendant’s episodic emails, texts and phone calls to an Illinois resident likely won’t be enough to subject the defendant to personal jurisdiction in Illinois.

 

Corporate Officer Can Owe Fiduciary Duty to Company Creditors – IL Court in ‘Deep Cut’* Case

Five years in, Workforce Solutions v. Urban Services of America, Inc., 2012 IL App (1st) 111410 is still a go-to authority for its penetrating analysis of the scope of post-judgment proceedings, the nature of fraudulent transfer claims and the legal relationship between corporate officers and creditors.

Here are some key questions and answers from the case:

Q1: Is a judgment creditor seeking a turnover order from a third party on theory of fraudulent transfer (from debtor to third party) entitled to an evidentiary hearing?

A1: YES

Q2: Does the denial of a turnover motion preclude that creditor from filing a direct action against the same turnover defendants?

A2: NO.

Q3: Can officer of a debtor corporation owe fiduciary duty to creditor of that corporation?

Q3: YES.

The plaintiff supplier of contract employees sued the defendant in 2006 for breach of contract.  After securing a $1M default judgment in 2008, the plaintiff instituted supplementary proceedings to collect on the judgment.  Through post-judgment discovery, plaintiff learned that the defendant and its officers were operating through a labyrinthine network of related business entities.  In 2010, plaintiff sought a turnover order from several third parties based on a 2008 transfer of assets and a 2005 loan from the debtor to third parties.

That same year (2010), plaintiff filed a new lawsuit against some of the entities that were targets of the motion for turnover order in the 2006 case.

In the 2006 case, the court denied the turnover motion on the basis that the plaintiff failed to establish that the turnover defendants received fraudulent transfers from the judgment debtor and that the fraudulent transfer claims were time-barred.  740 ILCS 160/10 (UFTA claims are subject to four-year limitations period.)

The court in the 2010 case dismissed plaintiff’s claims based on the denial of plaintiff’s turnover motion in the 2006 case.  Plaintiff appealed from both lawsuits.

Section 2-1402 of the Code permits a judgment creditor to initiate supplementary proceedings against a judgment debtor to discover assets of the debtor and apply those assets to satisfy an unpaid judgment

A court has broad powers to compel the application of discovered assets to satisfy a judgment and it can compel a third party to turn over assets belonging to the judgment debtor.

The only relevant inquiries in a supplementary proceeding are (1) whether the judgment debtor is holding assets that should be applied to the judgment; and (2) whether a third-party citation respondent is holding assets of the judgment debtor that should be applied to the judgment. .  If the facts are right, an UFTA claim can be brought in supplementary proceedings

But where there are competing claimants to the same asset pool, they are entitled to a trial on the merits (e.g. an evidentiary hearing) unless they waive the trial and stipulate to have the turnover motion decided on the written papers.

Here, the court disposed of the turnover motion on the bare arguments of counsel.  It didn’t conduct the necessary evidentiary hearing and therefore committed reversible error when it denied the motion.

The defendants moved to dismiss the 2010 case – which alleged breach of fiduciary duty, among other things – on the basis of collateral estoppel.  They argued that the denial of the plaintiff’s motion for turnover order in the 2006 precluded them from pursuing the same claims in the 2010 case.  Collateral estoppel or “issue preclusion” applies where: (1) an issue previously adjudicated is identical to the one in a pending action; (2) a final judgment on the merits exists in the prior case; and (3) the prior action involved the same parties or their privies.

The appeals court found that there was no final judgment on the merits in the 2006 case.  Since the trial court failed to conduct an evidentiary hearing, the denial of the turnover order wasn’t final.  Since there was no final judgment in the 2006 suit, the plaintiff was not barred from filing its breach of fiduciary duty and alter ego claims in 2010.

The Court also reversed the trial court’s dismissal of the plaintiff’s breach of fiduciary duty claims against the corporate debtor’s promoters.  To state a claim for breach of fiduciary duty, a plaintiff must allege that the defendant owes him a fiduciary duty; that the defendant breached that duty; and that he was injured as a proximate result of that breach.

The promoter defendants argued plaintiff lacked standing to sue since Illinois doesn’t saddle corporate officers with fiduciary duties to a corporation’s creditors. The Court allowed that as a general rule, corporate officers only owe fiduciary duties to the corporation and shareholders.  “However, under certain circumstances, an officer may owe a fiduciary duty to the corporation’s creditors….specifically, once a corporation becomes insolvent, an officer’s fiduciary duty extends to the creditors of the corporation because, from the moment insolvency arises, the corporation’s assets are deemed to be held in trust for the benefit of its creditors.

Since plaintiff alleged the corporate defendant was insolvent, that the individual defendants owed plaintiff a duty to manage the corporate assets, and a breach of that duty by making fraudulent transfers to various third parties, this was enough to sustain its breach of fiduciary duty claim against defendants’ motion to dismiss. (¶¶ 83-84).

Afterwords:

1/ A motion for turnover order, if contested, merits a full trial with live witnesses and exhibits.

2/ A denial of a motion for a turnover order won’t have preclusive collateral estoppel effect on a later fraudulent transfer action where there was no evidentiary hearing to decide the turnover motion

3/ Once a corporation becomes insolvent, an officer’s fiduciary duty extends to creditors of the corporation.  This is because once insolvency occurs, corporate assets are deemed held in trust for the benefit of creditors.

* In the rock radio realm, a deep cut denotes an obscure song – a “B-side” – from a popular recording artist or album.  Examples: “Walter’s Walk” (Zeppelin); “Children of the Sea” (Sabbath); “By-Tor And the Snow Dog” (Rush).

Discovery Rule Can’t Save Trustee’s Fraud Suit – No ‘Continuing’ Violation Where Insurance Rep Misstates Premium Amount – IL Court

Gensberg v. Guardian, 2017 IL App (1st) 153443-U, examines the discovery rule in the context of common law and consumer fraud as well as when the “continuing wrong” doctrine can extend a statute of limitations.

Plaintiffs bought life insurance from agent in 1991 based in part on the agent’s representation that premiums would “vanish” in 2003 (for a description of vanishing premiums scenario, see here).  When the premium bills didn’t stop in 2003, plaintiff complained and the agent informed it that premiums would cease in 2006.

Plaintiff complained again in 2006 when it continued receiving premium bills.  This time, the agent informed plaintiff the premium end date would be 2013. It was also in this 2006 conversation that the agent, for the first time, informed plaintiff that whether premiums would vanish is dependent on the policy dividend interest rate remaining constant.

When the premiums still hadn’t stopped by 2013, plaintiff had seen (or heard enough) and sued the next year.  In its common law and consumer fraud counts, plaintiff alleged it was defrauded by the insurance agent and lured into paying premiums for multiple years as a result of the agent’s misstatements.

The Court dismissed the plaintiffs’ suit on the grounds that plaintiff’s fraud claims were time barred under the five-year and three-year statutes of limitation for common law and statutory fraud.

Held: Dismissal Affirmed.

Rules/reasons:

The statute of limitations for common law fraud and consumer fraud is five years and three years, respectively. 735 ILCS 5/13-205, 805 ILCS 505/10a(e). Here, plaintiff sued in 2014.  So normally, its fraud claims had to have accrued in 2009 (common law fraud) and 2011 (consumer fraud) at the earliest for the claims to be timely.  But the plaintiff claimed it didn’t learn it was injured until 2013 under the discovery rule.

The discovery rule, which can forestall the start of the limitations period, posits that the statute doesn’t begin to run until a party knows or reasonably should know (1) of an injury and that (2) the injury was wrongfully caused. ‘Wrongfully caused’ under the discovery rule means there is enough facts for a reasonable person would be put on inquiry notice that he/she may have a cause of action. The party relying on the discovery rule to file suit after a statute of limitations runs has the burden of proving the date of discovery. (¶ 23)

The plaintiff alleged that it wasn’t until 2013 that it first learned that defendant misrepresented the vanishing date for the insurance premiums.
The Court rejected this argument based on the allegations of the plaintiff’s complaint. It held that the plaintiff knew or should have known it was injured no later than 2006 when the agent failed to adhere to his second promised deadline (the first was in 2003 – the original premium end date) for premiums to cease.

Plaintiff stated it complained to the insurance agent in 2003 and again in 2006 that it shouldn’t be continuing to get billed.  The court found that the agent’s failure to comply with multiple promised deadlines for premiums to stop should have put plaintiff on notice that he was injured in 2003 at the earliest and 2006 at the latest. Since plaintiff didn’t sue until 2014 – eight years later – both fraud claims were filed too late.

Grasping at a proverbial straw, the plaintiff argued its suit was saved by the “continuing violation” rule.  This rule can revive a time-barred claim where a tort involves repeated harmful behavior.  In such a case, the statute of limitations doesn’t run until (1) the date of the last injury or (2) when the harmful acts stop. But, where there is a single overt act which happens to spawn repetitive damages, the limitations period is measured from the date of the overt act. (¶ 26).

The court in this case found there was but a single harmful event – the agent’s failure to disclose, until 2006, that whether premiums would ultimately vanish was contingent on dividend interest rates remaining static. As a result, plaintiff knew or should have known it was harmed in 2006 and could not take advantage of the continuing violation rule to lengthen its time to sue.

Take-aways:

1/ Fraud claims are subject to a five-year (common law fraud) and three-year (consumer fraud) limitations period;

2/ The discovery rule can extend the time to sue but will not apply where a reasonable person is put on inquiry notice that he may have suffered an actionable wrong;

3/  “Continuing wrong” doctrine doesn’t govern where there is a single harmful event that has ongoing ramifications. The plaintiff’s time to sue will be measured from the date of the tortious occurrence and not from when damages happen to end.

Defendant Doesn’t Abandon Counterclaim By Failing to Replead It In Response to Amended Complaint – Ohio Fed. Court

I recently faced this procedural quandary: Plaintiff (that’s us) filed a complaint.  Defendant responded by filing an answer and counterclaim.  After receiving court leave, and before responding to the counterclaim, we amended the complaint.  Defendant answered the amended complaint and filed affirmative defenses but did not replead its counterclaim.

Defendant later threatened to default us if we didn’t answer its prior counterclaim.  I argued that the earlier counterclaim was extinguished by the amended complaint since the defendant didn’t file a counterclaim to it.  The defendant thought otherwise.  Ultimately, to avoid spending time and money on a collateral issue, I answered the counterclaim – even though I don’t think I had to.

My research revealed a definite split of authority on the issue.  Some courts hold that an amended pleading supersedes not only the original complaint (that’s obvious) but also an earlier counterclaim to the superseded complaint.  Others take the opposite tack and find that a counterclaim is separate from the answer and that even where a complaint is withdrawn and amended, the prior counterclaim still remains and must be answered.

Mathews v. Ohio Public Employees Retirement System, 2014 WL 4748472 reflects a court weighing the facts of a given case in deciding whether a defendant must replead its counterclaim or can stand on the one it previously filed.

The plaintiffs sued alleging their disability retirement benefits were wrongly denied.  The pension fund defendant filed an answer and counterclaim to recover overpaid benefits. The plaintiff later filed an Amended Complaint to which the defendant answered but did not re-assert a counterclaim.  Plaintiff moved for judgment on the pleadings based on the absence of a counterclaim with defendant’s answer to the amended pleading.  The defendant then moved for leave to file a counterclaim to the Amended Complaint.  Plaintiff opposed the motion.

Siding with the defendant, the Ohio Federal court looked to the interplay between Federal Rules 13 and 15 and noted that “courts are divided” on whether a party must replead a counterclaim in response to an amended complaint.

Federal Rule 13 requires a pleading to state compulsory counterclaims and allows it to allege permissive counterclaims.

Federal Rule 15(a)(3) provides that, “[u]nless the court orders otherwise, any required response to an amended pleading must be made within the time remaining to respond to the original pleading or within 14 days after service of the amended pleading, whichever is later.”

Some courts interpret this to mean that a defendant must replead a counterclaim in response to an amended complaint or it abandons or waives the right to pursue the counterclaim* while others do not require a defendant to replead a counterclaim with its response to an amended complaint.**

Still, a third line of cases decides the question on a case-by-case basis: it considers whether plaintiff received notice of the counterclaim, whether the defendant pursued the counterclaim and whether plaintiff will suffer unfair prejudice if the prior counterclaim proceeds.

The Court ultimately followed the latter case authorities; it weighed the equities to decide whether the defendant abandoned its counterclaim.  In allowing the defendant to file a counterclaim to the plaintiff’s Amended Complaint, the Court noted that Plaintiff had been on notice for several months that defendant intended to pursue its counterclaim and even replied to the counterclaim.

The Court also cited Plaintiff’s failure to establish prejudice if the Defendant was allowed to file a counterclaim. The Court rejected plaintiff’s judicial economy argument by noting that discovery was already closed when plaintiff moved for judgment on the pleadings and the proposed amended answer and counterclaim injected no new facts to the previously filed counterclaim.

Afterwords: When a complaint is amended it is treated as abandoned.  However, if a defendant filed a counterclaim along with its answer to the abandoned complaint, there is case authority (not just in Ohio but in other states, too) for the proposition that the counterclaim is not extinguished and the plaintiff still must answer it.

Mathews and cases like it demonstrate that the safe procedural play is for a defendant to replead its counterclaim with its answer to an amended pleading.  Otherwise, the defendant may have to defend against a claim that it waived its counterclaim by not refiling it in response to the amended pleading.

 

 

* Gen. Mills, Inc. v. Kraft Foods Global, Inc., 487 F.3d 1368, 1376–77 (Fed.Cir.2007); Bremer Bank, Nat’l Ass’n, 2009 U.S. Dist. LEXIS 21055, at *40–41, 2009 WL 702009   Nat’l Mut. Cas. Ins. Co. v. Snider, 996 F.Supp.2d 1173, 1180 n. 8 (M.D.Ala.2014)

** Performance Sales & Mktg. LLC v. Lowe’s Cos., No. 5:07–cv–00140, 2013 U.S. Dist. LEXIS 117835, at *9 n. 2, 2013 WL 4494687 (W.D.N.C. Aug. 20, 2013); Ground Zero Museum Workshop v. Wilson, 813 F.Supp.2d 678, 705–06 (D.Md. Aug.24, 2011)

*** Davis v. Beard, 2014 U.S. Dist. LEXIS 30461, at *12–13, 2014 WL 916947 (E.D.Mo. Mar. 10, 2014) Hitachi Med. Sys. Am., Inc. v. Horizon Med. Grp., 2008 WL 5723531 (N.D.Ohio 2008) ; AVKO Educ. Research Found. v. Morrow, 2013 U.S. Dist. LEXIS 49463, at *30, 2013 WL 1395824 (E.D.Mich. Apr. 5, 2013); Cairo Marine Serv. v. Homeland Ins. Co., No. 4:09CV1492, 2010 U.S. Dist. LEXIS 117365, at *3–4, 2010 WL 4614693 (E.D.Mo. Nov. 4, 2010)

 

‘Lifetime’ Verbal Agreement To Share in Real Estate Profits Barred by Statute of Frauds – IL 1st Dist.

I previously summarized an Illinois case illustrating the Statute of Frauds’ (SOF) “one-year rule” which posits that a contract that can’t possibly be performed within one year from formation must be in writing.

Church Yard Commons Limited Partnership v. Podmajersky, 2017 IL App (1st) 161152, stands as a recent example of a court applying the one-year rule with harsh results in an intrafamily dispute over a Chicago real estate business.

The plaintiff (a family member of the original business owners) sued the defendant (the owners’ successor and son) for breach of fiduciary duties in connection with the operation of family-owned real estate in Chicago’s Pilsen neighborhood.  The defendant filed counterclaims to enforce a 2003 oral agreement to manage his parents’ realty portfolio in exchange for a partnership interest in the various entities that owned the real estate.   The trial court dismissed the counterclaim on the basis that the oral agreement equated to a “lifetime employment contract” and violated the SOF’s one-year rule.  Defendant appealed.

Result: Counterclaim’s dismissal affirmed.

Reasons:

The SOF’s purpose is to serve as an evidentiary safeguard: in theory, the Statute protects defendants and courts from proof problems associated with oral contracts since “with the passage of time evidence becomes stale and memories fade.”  (¶ 26; McInerney v. Charter Golf, Inc., 176 Ill.2d 482, 489 (1997).

An SOF defense is a basis for dismissal under Code Section 2-619(a)(7).

Section 1 of the SOF, 740 ILCS 80/1, provides: “No action shall be brought…upon any agreement that is not to be performed within the space of one year from the making thereof” unless the agreement is in writing.

Under this one-year rule, if an oral agreement can potentially be performed within the space of one year (from creation), regardless of whether the parties’ expected it to be performed within a year, it does not have be in writing.  As a result, contracts of uncertain duration normally don’t have to comply with the one-year rule – since they can conceivably be performed within a year.

What About Lifetime Employment Contracts?

Lifetime employment agreements, however, are the exception to this rule governing contracts of unclear duration.  Illinois courts view lifetime contracts as pacts that contemplate a permanent relationship.  And even though a party to a lifetime agreement could die within a year, the courts deem a lifetime agreement as equivalent to one that is not to be performed within a space of a year.  As a result, a lifetime employment contract must be in writing to be enforceable.

Here, the 2003 oral agreement involved the counterplaintiff’s promise to dedicate his life to furthering the family’s real estate business.  It was akin to a lifetime employment agreement.  Since the 2003 oral agreement was never reduced to writing, it was unenforceable by the counterclaim under the SOF one-year rule. (¶¶ 30-31)

What About the Partial Performance Exception?

The Court also rejected counter-plaintiff’s partial performance argument.  In some cases, a court will refuse to apply the SOF where a plaintiff has partially or fully performed under an oral contract and it would be unfair to deny him/her recovery.  Partial performance will only save the plaintiff where the court can’t restore the parties to the status quo or compensate the plaintiff for the work he/she did perform.

Here, the Counterplaintiff was fully compensated for the property management services he performed – it received management fees of nearly 20% of collected revenue.

Afterwords:

This case validates Illinois case precedent that holds lifetime employment contracts must be in writing to be enforceable under the SOF’s one-year rule.  It also makes clear that a party’s partial performance won’t take an oral contract outside the scope of the SOF where the party has been (or can be) compensated for the work he/she performed.  The partial performance exception will only defeat the SOF where the performing party can’t be compensated for the value of his/her services.

 

 

 

Veil Piercing Claim Triable By Jury; Consumer Fraud Act Applies to Failed Gas Station Sale – IL 3rd Dist.

An Illinois appeals court recently affirmed a $700K money judgment for a gas station buyer in a fraud case against the seller.

The plaintiff gas station buyer in Benzakry v. Patel, 2017 IL App(3d) 160162 sued the seller when the station closed only a few months after the sale.

The plaintiff alleged he relied on the seller’s misrepresenting the financial health and trustworthiness of the station tenant which led the plaintiff to go forward with the station purchase.  Plaintiff sued for common law and statutory fraud and sought to pierce the corporate veil of the LLC seller.

Affirming judgment for the plaintiff, the Third District discusses, among other things, the piercing the corporate veil remedy, the required evidentiary foundation for business records, the reliance element of fraud and the scope of the consumer fraud statute.

Piercing the Corporate Veil: Triable By Bench or Jury?

The jury pierced the seller LLC’s corporate veil and imposed liability on the lone LLC member.

The Court addressed this issue of first impression on appeal: whether a piercing the corporate veil claim is one for the court or jury.  The Court noted a split in Federal authority on the point.  In FMC v. Murphree, 632 F.2d 413 (5th Cir. 1980), the 5th Circuit held that a jury could hear a piercing claim while the  7th Circuit reached the opposite result (only a court can try a piercing action) in IFSC v. Chromas Technologies, 356 F.3d 731 (7th Cir. 2004).

The Court declined to follow either case since they applied only Federal procedural law (they were diversity cases).  The Court instead looked to Illinois state substantive law for guidance.

Generally, there is no right to a jury trial in equitable claims and piercing the corporate veil is considered an equitable remedy.  However, Code Section 2-1111 vests a court with discretion to direct any issue(s) involved in an equitable proceeding to be tried by a jury.  The appeals court found that the trial court acted within its discretion in deciding that the piercing claim should be decided by a jury. (¶¶ 29-30)

Consumer fraud – Advertisement on Web = ‘Public Injury’

The Third District reversed the trial court’s directed verdict for the defendants on the plaintiff’s Consumer Fraud Act (CFA) count.  Consumer fraud predicated on deceptive practices requires the plaintiff to prove (1) a deceptive act or practice by a defendant, (2) defendant’s intent that the plaintiff rely on the deception, (3) the occurrence of the deception during a course of conduct involving trade or commerce, (4) actual damage to the plaintiff, and (5) damage proximately caused by the deception.

The trial court sided with the defendant on this count since the plaintiff didn’t prove that defendants conduct resulted in injury to the public generally.  CFA Section 10a (815 ILCS 505/10a) used to require a plaintiff to prove that a misrepresentation involved trade practice that addressed the market generally.  However, a 1990 amendment to the Act changed that.  The current version of the Act doesn’t require a plaintiff to show public injury except under limited circumstances.

Even so, the Court still held that the defendant’s misstating the gas station’s annual fuel and convenience store sales on a generally accessible website constituted a public injury under the CFA.

Going further, the Court construed the CFA broadly by pointing to the statutory inclusion of the works “trade” and “commerce.”  This evinced the legislative intent to expand the CFA’s scope.  Since defendant’s misrepresentations concerning the tenant were transmitted to the public via advertisements and to the plaintiff through e-mails, the Court viewed this as deceptive conduct involving trade or commerce under the CFA.  (¶¶ 81-82)

Computer-Generated Business Records: Document Retention vs. Creation

While it ultimately didn’t matter (the business records were cumulative evidence that didn’t impact the judgment amount), the Court found that bank statements offered into evidence did not meet the test for admissibility under Illinois evidence rules.

The proponent of computer-generated business records must show (1) the equipment that created a document is recognized as standard, and (2) the computer entries were made in the regular course of business at or reasonably near the happening of the event recorded.

Showing “mere retention” of a document isn’t enough: the offering party must produce evidence of a document’s creation to satisfy the business records admissibility standard.  Here, the plaintiff failed to offer foundational testimony concerning the creation of the seller’s bank statements and those statements shouldn’t have been admitted into evidence.

Take-aways:

1/ The Court has discretion to order that an equitable piercing the corporate veil claim be tried to a jury;

2/ Inadequate capitalization, non-functioning shareholders and commingling of funds are badges of fraud or injustice sufficient to support a piercing the corporate veil remedy;

3/ Computer-generated business records proponent must offer foundational testimony of a document’s creation to get the records in over a hearsay objection;

4/ False advertising data on a public website can constitute a deceptive practice under the consumer fraud statute.

 

 

Family Trust Set Up in Good Faith Shields Family Member from Creditor – IL Case Note

In Hickory Point Bank & Trust v. Natual Concepts, Inc., 2017 IL App (3d) 160260, the appeals court affirmed a trial court’s denial of a judgment creditor’s motion to impose a judicial lien and order the turnover of trust assets.

The corporate defendant defaulted on the loan that was guaranteed by corporate principals.

Plaintiff entered confessed judgments against the corporate and individual defendants.

Through post-judgment proceedings, plaintiff learned one of the individual defendants was trustee of an irrevocable family trust whose sole asset was four pieces of real estate formerly owned by the defendant’s father.

The document provided that upon death of defendants’ parents, the trust assets would be distributed 85% to defendant with the rest (15%) going to defendant’s three sons.

To satisfy its default judgment against defendant, plaintiff alternately moved to liquidate and turnover the trust assets and to impress a judicial lien against the trust property.

The trial court held that the trust was protected from judgment creditors under Code section 2-1403 (735 ILCS 5/2-1403) and denied the plaintiff’s motion. Plaintiff appealed.

The central issue was whether or not the trust was self-settled.  A “self-settled” trust is “a trust in which the settlor is also the person who is to receive the benefits from the trust, usually set up in an attempt to protect the trust assets from creditors.” Black’s Law Dictionary 1518 (7th ed. 2002).

Like most states, Illinois follows the general rule that a self-settled trust created for the settlor’s own benefit will not protect trust assets from the settlor’s creditors. See Rush University Medical Center v. Sessions, 2012 IL 112906, ¶ 20.

Code Section 2-1403 codifies the rule that protects trusts that are not self-settled.  This statute states:

“No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor.” 735 ILCS 5/2–1403 (West 2014).

Based on the plain statutory text, a creditor’s judgment cannot be satisfied by funds held in trust for a judgment debtor where (1) the trust was created in good faith and (2) a person other than the judgment debtor created the trust or the funds held in trust proceeded from someone other than the judgment debtor.

Here, there was evidence that the trust was formed in good faith.  It pre-dated by five years the date of the commercial loan and defendants’ default.  There was no evidence the trust was created to dodge creditors like the plaintiff.  The trust language stated it was designed for the care of Defendant’s elderly parents during their lifetimes.

The Court also deemed significant that Defendant was not the trust beneficiary. Again, the trust was set up to benefit Defendants’ parents and the trust was funded with the parents’ assets.  Because the trust assets originated from someone other than the defendant, the second prong of Section 2-1403 was satisfied.

Plaintiff’s alternative argument that the court should impress a judicial lien against defendant’s 85% trust interest also failed.  The law is clear that a creditor may not impose a lien on funds that are in the hands of a trustee.  But once those trust funds are distributed to a beneficiary, a creditor can access them. (¶¶ 26-27)

Since thse trust assets (the four real estate parcels) had not been distributed to defendants under the terms of the trust, defendant’s interest in the properties could not be liened by the plaintiff.

Afterwords:

A good example of a family trust shielding trust assets from the reach of a family member’s creditor.

Self-settled trusts (trusts where the settlor and beneficiary are the same person) are not exempt from creditor interference.  However, where the trust is created in good faith and funded with assets originating from someone other than a debtor, a creditor of that debtor will not be able to attach the trust assets until they “leave” the trust and are distributed to the debtor.

 

Technically Non-Final Default Judgment Still Final Enough to Support Post-Judgment Enforcement Action – IL Fed Court (From the Vault)

Dexia Credit Local v. Rogan, 629 F.3d 612 (7th Cir. 2011) reminds me of a recent case I handled in a sales commission dispute.  A Cook County Law Division Commercial Calendar arbitrator ruled for our client and against a corporate defendant and found for the individual defendant (an officer of the corporate defendant) against our client on a separate claim.  On the judgment on award (JOA) date, the corporate defendant moved to extend the seven-day rejection period.  The judge denied the motion and entered judgment on the arbitration award.

Inadvertently, the order recited only the plaintiff’s money award against the corporate defendant: it was silent on the “not liable” finding for the individual defendant.  To pre-empt the corporate defendant’s attempt to argue the judgment wasn’t a final order (and not enforceable), we moved to correct the order retroactively or, nunc pro tunc, to the JOA date so that it recited both the plaintiff’s award against the corporation and the corporate officer’s award versus the plaintiff.  This “backdated” clarification to the judgment order permitted us to immediately issue a Citation to Discover Assets to the corporate defendant without risking a motion to quash the Citation.

While our case didn’t involve Dexia’s big bucks or complicated facts, one commonality between our case and Dexia was the importance of clarifying whether an ostensibly final order is enforceable through post-judgment proceedings.

After getting a $124M default judgment against the debtor, the Dexia plaintiff filed a flurry of citations against the judgment debtor and three trusts the debtor created for his adult children’s’ benefit.

The trial court ordered the trustee to turnover almost all of the trust assets (save for some gifted monies) and the debtor’s children appealed.

Affirming, the Seventh Circuit first discussed the importance of final vs. non-final orders.

The defendants argued that the default judgment wasn’t final since it was silent as to one of the judgment debtor’s co-defendants – a company that filed bankruptcy during the lawsuit.  The defendants asserted that since the judgment didn’t dispose of plaintiff’s claims against all defendants, the judgment wasn’t final and the creditor’s post-judgment citations were premature.

In Illinois, supplementary proceedings like Citations to Discover Assets are unavailable until after a creditor first obtains a judgment “capable of enforcement.”  735 ILCS 5/2-1402.  The debtor’s children argued that the default judgment that was the basis for the citations wasn’t enforceable since it did not resolve all pending claims.   As a result, according to debtor’s children, the citations were void from the start.

The Court rejected this argument as vaunting form over substance.  The only action taken by the court after the default judgment was dismissing nondiverse, dispensable parties – which it had discretion to do under Federal Rule 21.  Under the case law, a court’s dismissal of dispensable, non-diverse parties retroactively makes a pre-dismissal order final and enforceable.

Requiring the plaintiff to reissue post-judgment citations after the dismissal of the bankrupt co-defendant would waste court and party resources and serve no useful purpose.  Once the court dismissed the non-diverse defendants, it “finalized” the earlier default judgment.

Afterwords:

A final order is normally required for post-judgment enforcement proceedings.  However, where an order is technically not final since there are pending claims against dispensable parties, the order can retroactively become final (and therefore enforceable) after the court dismisses those parties and claims.

The case serves as a good example of a court looking at an order’s substance instead of its technical aspects to determine whether it is sufficiently final to underlie supplementary proceedings.

The case also makes clear that a creditor’s request for a third party to turn over assets to the creditor is not an action at law that would give the third party the right to a jury trial.  Instead, the turnover order is coercive or equitable in nature and there is no right to a jury trial in actions that seek equitable relief.

 

New York’s Public Policy On Construction Dispute Venue Trumps Illinois Forum-Selection Clause – IL 2d Dist.

Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (1st) 150839 offers a nuanced discussion of forum selection clauses and choice-of-law principles against the backdrop of a multi-jurisdictional construction dispute.

The plaintiff general contractor (GC) sued a subcontractor (Sub) in Illinois state court for breach of a construction contract involving New York (NY) real estate.  The contract had a forum selection clause that pegged Kane County Illinois (IL) as the forum for any litigation involving the project.  

The trial court agreed with the Sub’s argument that the forum-selection clause violated NY public policy (that NY construction litigation should be decided only in NY) and dismissed the GC’s suit.  Affirming, the Second District discusses the key enforceability factors for forum-selection clauses when two or more jurisdictions are arguably the proper venue for a lawsuit.

Public Policy – A Statutory Source

The Court first observed that IL’s and NY’s legislatures both addressed the proper forum for construction-related lawsuits.  Section 10 of Illinois’ Building and Construction Contract Act, 815 ILCS 665/10, voids any term of an IL construction contract that subjects the contract to the laws of another state or that requires any litigation concerning the contract to be filed in another state.

NY’s statute parallels that of Illinois.  NY Gen. Bus. Law Section 757(1) nullifies construction contract terms that provide for litigation in a non-New York forum or that applies (non-) NY law.

Since a state’s public policy is found in its published statute (among other places), NY clearly expressed its public policy on the location for construction litigation.

Forum Selection and Choice-of-Law Provisions

An IL court can void a forum-selection clause where it violates a fundamental IL policy.  A forum-selection clause is prima facie valid unless the opposing side shows that enforcement of the clause would be unreasonable.

A forum-selection clause reached by parties who stand at arms’ length should be honored unless there is a compelling and countervailing reason not to enforce it. (¶ 75)

A choice-of-law issue arises where there is an actual conflict between two states’ laws on a given issue and it isn’t clear which state’s law governs.  Here, IL and NY were the two states with ostensible interests in the lawsuit.  There was also a plain conflict between the states’ laws: the subject forum-selection clause was prima facie valid in IL while it plainly violated NY law.

Which Law Applies – NY or IL?

Illinois follows Section 187 of the Restatement (Second) of Conflicts of Laws (1971) which provides that the laws of a state chosen by contracting parties will apply unless (1) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (2) application of the law of the chosen state would violate a fundamental policy of a state that has a materially greater interest than the chosen state on a given issue.

The Court found the second exception satisfied and applied NY law.  

Section 757 of NY’s business statute clearly outlaws forum-selection clauses that provide for the litigation of NY construction disputes in foreign states.  As a result, the contract’s forum clause clearly violates NY’s public policy of having NY construction disputes decided in NY.

The question then became which state, NY or IL, had the greater interest in the forum-selection clause’s enforcement?  Since NY was the state where the subcontractor resided, where the building (and contract’s finished product) was erected and the contract ultimately performed, the Court viewed NY as having a stronger connection.  Since allowing the case to proceed in IL clearly violated NY’s public policy, the Court affirmed dismissal of the GC’s lawsuit.

Afterwords:

Forum selection clauses are prima facie valid but not inviolable.  Where a chosen forum conflicts with a public policy of another state, there is a conflict of laws problem.  

The Court will then analyze which state has a more compelling connection to the case.  Where the state with both a clear public policy on the issue also has a clearer nexus to the subject matter of the lawsuit, the Court will apply that state’s (the one with the public policy and closer connection) law on forum-selection clauses.

 

As-Is Language In Sales Literature Defeats Fraud Claim Involving ’67 Corvette (Updated April 2017)

In late March 2017, a Federal court in Illinois granted summary judgment for a luxury car auctioneer in a disgruntled buyer’s lawsuit premised on a claimed fake Corvette.

The Corvette aficionado plaintiff in Pardo v. Mecum Auction, Inc., 2017 WL 1217198 alleged the auction company misrepresented that a cobbled-together 1964 Corvette was a new 1967 Corvette – the vehicle plaintiff thought he was buying.  Plaintiff’s suit sounded in common law fraud and breach of contract.  The Court previously dismissed the fraud suit and later granted summary judgment for the defendant on the plaintiff’s breach of contract claim.

The Court dismissed the fraud suit based on “non-reliance” and “as-is” language in the contract.  Since reliance is a required fraud element, the non-reliance clause preemptively gutted the plaintiff’s fraud count.

Denying the plaintiff’s motion to reconsider, the Court noted that an Illinois fraud claimant cannot allege he relied on a false statement when the same writing provides he’s buying something in as-is condition.  The non-reliance/as-is disclaimer also neutralizes a fraud claim based on oral statements and defeats breach of express and implied warranty claims aimed at misstatements concerning a product.

By attaching the contract which contained the non-reliance language, the plaintiff couldn’t prove his reliance as a matter of law.

The Court found for the defendant on plaintiff’s breach of contract claim.  The plaintiff’s operative Second Amended Complaint alleged the auction company breached a title processing section of the contract: that it failed to timely deliver title to the vehicle to the plaintiff.

The Court sided with the auction company based on basic contract interpretation rules.  All the contract required was that the defendant “process” the title within 14 business days of the sale.  It didn’t saddle the defendant with an obligation to deliver the title to a specific person.  Since the evidence in the record revealed that the defendant did process and transfer the title to a third party within the 14-day time frame, plaintiff could not prove that defendant breached the sales contract.

The plaintiff also couldn’t prove damages – another indispensable breach of contract element.  That is, even if the auction company failed to process the title, the plaintiff didn’t show that it suffered any damages.  The crux of the plaintiff’s lawsuit was that it was sold a car that differed from what was advertised.  Whether the defendant complied with the 14-day title processing requirement had nothing to do with plaintiff’s alleged damages.

Since the plaintiff could not offer evidence to support its breach and damages components of its breach of contract action, the Court granted summary judgment for the defendant.

Lastly, the Court rejected plaintiff’s rescission remedy argument – that the contract should be rescinded for defendant’s fraud and failure to perform.

The Court’s ruling that the defendant performed in accordance with the title processing language defeated plaintiff’s nonperformance argument.  In addition, the Court prior dismissal of the plaintiff’s fraud claim based on the contractual non-reliance language knocked out the rescission-based-on-fraud argument.

 

Afterwords:

Non-reliance or “as is” contract text will make it hard if not impossible to allege fraud in connection with the sale of personal property;

A breach of contract carries the burden of proof on both breach and damages elements.  The failure to prove either one is fatal to a breach of contract claim.

In hindsight, the plaintiff should have premised its breach of contract claim on the defendant’s failure to deliver a car different from what was promoted. This arguably would have given the plaintiff a “hook” to keep its breach of contract suit alive and survive summary judgment.

 

Pay-When-Paid Clause in Subcontract Not Condition Precedent to Sub’s Right to Payment – IL Court

Pay-if-paid and pay-when-paid clauses permeate large construction projects

In theory, the clauses protect a contractor from downstream liability where its upstream or hiring party (usually the owner) fails to pay.

Beal Bank Nevada v. Northshore Center THC, LLC, 2016 IL App (1st) 151697 examines the fine-line distinction between PIP and PWP contract terms. a lender sued to foreclose

The plaintiff lender sued to foreclose commercial property and named the general contractor (GC) and subcontractor (Sub) as defendants.  The Sub countersued to foreclose its nearly $800K lien and added a breach of contract claims against the GC.

In its affirmative defense to the Sub’s claim, the GC argued that payment from the owner to the GC was a condition precedent to the GC’s obligation to pay the Sub.  The trial court agreed with the GC and entered summary judgment for the GC.  The Sub appealed.

Result: Reversed.

Reasons:

The Subcontract provided the GC would pay the Sub upon certain events and arguably (it wasn’t clear) required the owner’s payment to the GC as a precondition to the GC paying the Sub.  The GC seized on this owner-to-GC payment language as grist for its condition precedent argument: that if the owner didn’t pay the GC, it (the GC) didn’t have to pay the Sub.

Under the law, a condition precedent is an event that must occur or an act that must be performed by one party to an existing contract before the other party is obligated to perform.  Where a  condition precedent is not satisfied, the parties’ contractual obligations cease.

But conditions precedent are not favored.  Courts will not construe contract language that’s arguably a condition precedent where to do so would result in a forfeiture (a complete denial of compensation to the performing party). (¶ 23)

The appeals court rejected the GC’s condition precedent argument and found the Subcontract had a PWP provision.  For support, the court looked to the contractual text and noted it attached two separate payment obligations to the GC – one was to pay the Sub upon “full, faithful and complete performance,”; the other, to make payment in accordance with Article 5 of the Subcontract which gave the GC a specific amount of time to pay the Sub after the GC received payment from the owner.

The Court reconciled these sections as addressing the amounts and timing of the GC’s payments; not whether the GC had to pay the Sub in the first place. (¶¶ 19-20)

Further support for the Court’s holding that there was no condition precedent to the GC’s obligation to pay the Sub lay in another Subcontract section that spoke to “amounts and times of payments.”  The presence of this language signaled that it wasn’t a question of if the GC had to pay the Sub but, instead, when it paid.

In the end, the Court applied the policy against declaring forfeitures: “[w]ithout clear language indicating the parties’ intent that the Subcontractor would assume the risk of non-payment by the owner, we will not construe the challenged language…..as a condition precedent.” (¶ 23)

Since the Subcontract was devoid of “plain and unambiguous” language sufficient to overcome the presumption against a wholesale denial of compensation, the Court found that the Subcontract contained pay-when-paid language and that there was no condition precedent to the Sub’s entitlement to payment from the GC.

Take-aways

Beal Bank provides a solid synopsis of pay-if-paid and pay-when-paid clauses.  PIPs address whether a general contractor has to pay a subcontractor at all while PWPs speak to the timing of a general’s payment to a sub.

The case also re-emphasizes that Section 21(e) of the Illinois Mechanics Lien Act provides that the presence of a PIP or PWP contract term is no defense to a mechanics lien claim (as opposed to garden-variety breach of contract claim).

Secretary of State’s LLC File Detail Report Is Public Record – IL Court (A Deep Cut)

R&J Construction v. Javaras, 2011 WL 10069461, an unpublished and dated opinion, still holds practical value for its discussion of the judicial notice rule, breach of contract pleading requirements and a limited liability company member’s insulation from liability for corporate debts.

The plaintiff sold about $70K worth of construction materials to a concrete company associated with the individual defendant.  The concrete company’s legal name was WS Concrete, LLC, an Illinois limited liability company doing business under the assumed name, West Suburban Concrete.  Defendant was a member of the LLC and point-person who ordered supplies from the plaintiff.

The plaintiff sued the individual and did not name the LLC as a party defendant.

The trial court dismissed the complaint because the plaintiff failed to attach the written contract and there was no evidence the defendant assumed personal responsibility for the contract obligations.  The plaintiff appealed.

Result: Affirmed.

Reasons:

The Court first found the trial court correctly dismissed plaintiff’s suit for failure to attach the operative contract.

Code Section 2-606 requires a plaintiff to attach a written instrument (like a contract) to its pleading where the pleading is based on that instrument.  The exception is where the pleader can’t locate the instrument in which case it must file an affidavit stating the instrument is inaccessible.

Here, the plaintiff alleged a written contract but only attached a summary of various purchase orders and invoices to the complaint.  Since it failed to attach the contract, the appeals court found the complaint deficient and falling short of Section 2-606’s attached-instrument requirement.

The court next addressed whether the LLC File Detail Report (see above image), culled from the Illinois Secretary of State “cyberdrive” site was admissible on Defendant’s motion to dismiss.  In ruling the Report was admissible, the Court cited to case precedent finding that Secretary of State records are public records subject to judicial notice.  (Judicial notice applies to facts that are readily verifiable and not subject to reasonable dispute.)

Since the LLC Report plainly demonstrated the proper defendant was the LLC (as opposed to its member), and there was no evidence the individual defendant took on personal liability for plaintiff’s invoices, the trial court correctly dismissed the defendant.

Added support for the defendant’s dismissal came via the Illinois Limited Liability Company Act, 805 ILCS 180/1 et seq.  Section 10-10 of the LLC Act provides that an LLC’s contractual obligations belong solely to the LLC and that a member cannot be personally responsible for LLC contracts unless (1) the articles of organization provide for personal liability and (2) the member consents in writing.

The Court next addressed plaintiff’s agent of a disclosed principal argument.  The plaintiff asserted that since the individual defendant is the person who ordered plaintiff’s construction materials and it was unclear who the defendant represented, the defendant was responsible for plaintiff’s unpaid invoices.

The court rejected this argument.  It noted that under Illinois law, where an agent signs a contract by signing his own name and providing his own personal contact information (address, phone number, SS #, etc.) and fails to note his corporate affiliation, he (the agent) can be personally liable on a contract.  In this case, however, there was no documentation showing defendant ordering supplies in his own name.  All invoices attached to the plaintiff’s response brief (to the motion to dismiss) reflected the LLC’s assumed name – “West Suburban Concrete” – as the purchasing entity.

Afterwords:

(1) the case provides a useful analysis of common evidentiary issues that crop up in commercial litigation where a corporate agent enters into an agreement and the corporation is later dissolved;

(2) Both the LLC Act and agency law can insulate an individual LLC member from personal liability for corporate debts;

(3) Secretary of State corporate filings are public records subject to judicial notice.  This is good news for trial practitioners since it alleviates the logistical headache of having a Secretary of State agent give live or affidavit testimony on corporate records at trial.

 

 

No-Reliance Clauses and Fraud Pleading Requirements – IL Fed Court Weighs In

The Case: Walls v. VreChicago Eleven, LLC, 2016 WL 5477554 (N.D.Ill. 2016)

Issues:  1/ Viability of ‘no-reliance’ clauses and as-is clauses in commercial real estate contracts; and 2/ Fraud pleading requirements under Federal Rules of Civil Procedure

Facts: Property purchaser plaintiffs claimed they were fraudulently induced to buy property by defendants who falsely claim the property was garnering annual rentals of $171K and the lease guarantor was a multi-million dollar business.

A few months after the purchase, the tenant (a KFC restaurant) fell behind in rent and informed plaintiff it could only pay $70K in annual rent.   Plaintiff evicted the KFC operator and re-leased it to a substitute tenant who paid less than the former (evicted) tenant.

Plaintiff sued the seller and its broker for fraud in the inducement and negligent misrepresentation. The defendants moved to dismiss.

Result: Motions to dismiss denied.

Reasons:

A standard no reliance provision is a type of contractual exculpatory clauses and provides that a purchaser is not relying on any representations of the seller that are not specifically spelled out in the purchase contract.

The purpose of a no reliance clause is to preemptively head off a fraud action by eliminating the reliance element that is a required component of a fraud claim.

No reliance clauses serve useful purpose as they insure that the transaction and any litigation stemming from it is based on the parties’ writings rather than unreliable memories and not subject to the risk of fabrication.

At the same time, exculpatory clauses are not favored under Illinois law and must be clear, explicit and unequivocal to be enforced.

Here, the court found the no reliance clause ambiguous.  First, the clause only spoke to representations or warranties of the seller; it said nothing about seller’s silence or omissions.  At least one Illinois court has held that a non-reliance clause only applies to affirmative fraud (e.g. representations, assertions of fact) and not to fraudulent concealment – defined as silence in the face of a duty to speak.  See, e.g. Benson v. Stafford, 941 N.E.2d 386, 410 (2010).

A second reason the court declined to dismiss the suit at the pleadings stage was because the no-reliance’s clause’s scope was unclear.  It found plausible plaintiff’s position that its claims that defendant misrepresented annual rent projections and the guarantor’s financial health exceeded the reach of the no-reliance clause.

A final reason the Court found the no-reliance clause ambiguous was because it was couched in the contract’s As-Is paragraph.  Because of this, it was reasonable  to conclude for the sake of argument that the no-reliance language only governed the condition of the property – not the tenant’s expected rents or the guarantor’s financial condition.

Textual ambiguity aside, the court turned to whether the no reliance clause was enforceable.  To determine the clause might be enforceable, the court considered (1) the clause’s ambiguity, (2) plaintiff allegations of seller’s misstatements contained in written offering and sales brochure documents (instead of in the purchase contract), (3) plaintiff’s claims that defendants impeded plaintiff’s pre-sale due diligence efforts, and (4) the assertion that defendants orchestrated a plan to deceive the plaintiffs and induce them to buy the property.

According to the court, there were too many disputed fact issues to decide that the no reliance clause was enforceable.  As a result, it was premature to dismiss plaintiff’s claims without the benefit of discovery.

Pleading Standards for Fraud – Rule 9(b)

The court also addressed the pleading standards for fraud in Federal court.

Rule 9(b) provides that a fraud plaintiff allege with particularity the circumstances that constitute fraud.  Specifically, the plaintiff must plead the who, what, where, when and how of the fraud.  The reason for elevated pleading rules for fraud is because of a fraud claim’s potential for severe harm to a business’s reputation.  The law requires a more thorough pre-complaint investigation than other causes of action so that fraud claims are factually supported and not extortionate or defamatory.

But when the details of a fraud are within the exclusive possession of a defendant, the fraud pleading rules are relaxed.  In such a case, the plaintiff must still allege the grounds for his/her suspicions of fraud.

Here, the plaintiff’s fraud allegations were premised on statements contained in the sales contract, the offering circular and sales brochure.  In addition, the plaintiff provided detailed facts supporting its claims that the defendants misled plaintiffs concerning the tenant, the annual rent and the guarantor’s fiscal status.  The Court found the plaintiff’s complaint adequately stated a fraud claim sufficient to survive a motion to dismiss.

Afterwords:

No reliance clauses are enforceable but they must be ambiguous and clearly encompass the subject matter of a lawsuit;

Fraud requires heightened pleading but when the critical fraud facts are solely in the defendant’s domain, the plaintiff is held to less pleading particularity.

 

General Contractor Insolvency, Not Owner Recourse, is Key Implied Warranty of Habitability Test – IL First Dist.

In Sienna Court Condominium Association v. Champion Aluminum Corporation, 2017 IL App (1st) 143364, the First District addressed two important issues of common law and statutory corporate law.  It first considered when a property owner could sue the subcontractor of a defunct general contractor where there was no contractual relationship between the owner and subcontractor and then examined when a defunct limited liability company (LLC) could file a lawsuit in the LLC’s name.

The plaintiff condo association sued the developer, general contractor (“GC”) and subcontractors for various building defects.  The subcontractors moved to dismiss the association’s claims on the ground that they couldn’t be liable for breaching the implied warranty of habitability if the plaintiff has possible recourse from the defunct GC’s insurer.

The trial court denied the subcontractors’ motion and they appealed.

Affirming denial of the subcontractors’ motions, the First District considered whether a homeowner’s implied warranty claim could proceed against the subcontractors of an insolvent GC where (1) the plaintiff had a potential source of recovery from the GC’s insurer or (2) the plaintiff had already recovered monies from a warranty fund specifically earmarked for warranty claims.

The court answered “yes” (plaintiff’s suit can go forward against the subs) on both counts. It held that when deciding whether a plaintiff can sue a subcontractor for breach of implied warranty of habitability, the focus is whether or not the GC is insolvent; not whether plaintiff can possibly recover (or even has recovered) from an alternate source (like a dissolved GC’s insurer).

For precedential support, the Court looked to 1324 W. Pratt Condominium Ass’n v. Platt Construction Group,   2013 IL App (1st) 130744 where the First District allowed a property buyer’s warranty claims versus a subcontractor where the general contractor was in good corporate standing and had some assets.  The court held that an innocent purchaser can sue a sub where the builder-seller is insolvent.

In the implied warranty of habitability context, insolvency means a party’s liabilities exceed its assets and the party has stopped paying debts in the ordinary course of its business. (¶¶ 89-90).  And under Pratt’s “emphatic language,” the relevant inquiry is GC’s insolvency, not plaintiff’s “recourse”.¶ 94

Sienna Court noted that assessing the viability of an owner’s implied warranty claim against a subcontractor under the “recourse” standard is difficult since there are conceivably numerous factual settings and arguments that could suggest plaintiff has “recourse.”  The court found the insolvency test more workable and more easily applied then the amorphous recourse standard. (¶ 96).

Next, the Court considered the chronological outer limit for a dissolved LLC to file a civil lawsuit.  The GC dissolved in 2010 and filed counterclaims in 2014.  The trial court ruled that the 2014 counterclaims were too late and time-barred them.

The appeals court affirmed.  It noted that Section 35-1 of the Illinois LLC Act (805 ILCS 180/1-1 et seq.) provides that an LLC which “is dissolved, and, unless continued pursuant to subsection (b) of Section 35-3, its business must be wound up,” upon the occurrence of certain events, including “Administrative dissolution under Section 35-25.” 805 ILCS 180/35-1

While Illinois’ Business Corporation Act of 1993 specifies that a dissolved corporation may pursue civil remedies only up to five years after the date of dissolution (805 ILCS 5/12.80 (West 2014)), the LLC Act is silent on when a dissolved LLC’s right to sue expires.  Section 35-4(c) only says “a person winding up a limited liability company’s business may preserve the company’s business or property as a going concern for a reasonable time”

The Court opted for a cramped reading of Section 35-4’s reasonable time language.  In viewing the LLC Act holistically, the Court found that the legislature contemplated LLC’s having a finite period of time to wind up its affairs including bringing any lawsuits.  Based on its restrictive interpretation of Section 35-4, the Court held the almost four-year gap between the GC’s dissolution (2010) and counterclaim filing (2014) did not constitute a reasonable time.

Afterwords:

Sienna Court emphasizes that a general contractor’s insolvency – not potential recourse – is the dominant inquiry in considering a property owner’s implied warranty of habitability claim against a subcontractor where the general contractor is out of business and there is no privity of contract between the owner and subcontractor.

The case also gives some definition to Section 35-4 of the LLC Act’s “reasonable time” standard for a dissolved LLC to sue on pre-dissolution claims.  In this case, the Court found that waiting four years after dissolution to file counterclaims was too long.

 

 

Snow Plower’s Quantum Meruit Claim Fails; Dissent Takes Rule 23 Publishing Standards to Task – IL 1st Dist.

In Snow & Ice, Inc. v. MPR Management, 2017 IL App (1st) 151706-U, a snow removal company brought breach of contract and quantum meruit claims against a property manager and several property owners for unpaid services.

The majority affirmed dismissal of the plaintiff’s claims and in dissent, Judge Hyman gives a scathing critique of Rule 23, which provides standards for publishing (or not) opinions, including the rule’s penchant for quiet minority voices on an appeals court.

Plaintiff sued to recover about $90K for snow removal services it supplied to nine separate properties managed by the property manager defendant.  After nonsuiting the management company, the plaintiff proceeded against the property owners on breach of contract and quantum meruit claims.

The trial court granted the nine property owners’ motion to dismiss on the basis there was no privity of contract between plaintiff and the owners.  The court dismissed the quantum meruit suit because an express contract between the plaintiff and property manager governed the parties’ relationship and a quantum meruit claim can’t co-exist with a breach of express contract action.

Affirming the Section 2-615 dismissal of the breach of contract claims, the appeals court rejected the plaintiff’s claim that the management company contracted with plaintiff on behalf of the property owner defendants.  In Illinois, agency is a question of fact, but the plaintiff still must plead facts which, if proved, could establish an agency relationship.

A conclusory allegation of a principal-agent relationship between property manager and owners is not sufficient to survive a motion to dismiss.  Since the plaintiff only alleged the bare conclusion that the property owners were responsible for the management company’s contract, the First District affirmed dismissal of plaintiff’s breach of contract claims.

The Court also affirmed the dismissal of the plaintiff’s quantum meruit claims against the owners.  A quantum meruit plaintiff must plead (1) that it performed a service to defendant’s benefit, (2) it did not perform the service gratuitously, (3) defendant accepted the service, and (4) no contract existed to prescribe payment for the service.  Quantum meruit is based on an implied promise by a recipient of services or goods to pay for something of value which it received.  (¶¶ 17-18).

Since the properties involved in the lawsuit were commercial (meaning, either vacant or leased), the Court refused to infer that the owners wanted the property plowed.  It noted that if the property was vacant, plaintiff would have to plead facts to show that the owner wanted plaintiff to clear snow from his/her property.  If leased, the plaintiff needed facts tending to show that the owner/lessor (as opposed to the tenant) implicitly agreed to pay for the plaintiff’s plowing services.  As plaintiff’s complaint was bereft of facts sufficient to establish the owners knew of and impliedly agreed to pay plaintiff for its services, the quantum meruit claim failed.

If leased, the plaintiff needed facts tending to show that the owner/lessor (as opposed to the tenant) implicitly agreed to pay for the plaintiff’s plowing services.  As plaintiff’s complaint was bereft of facts sufficient to establish the owners knew of and impliedly agreed to pay plaintiff for its services, the quantum meruit claim failed.

In dissent, Judge Hyman agreed that the plaintiff’s breach of contract claim was properly dismissed but found that the plaintiff did plead enough facts to sustain a quantum meruit claim.  Hyman’s dissent’s true value, though, lies in its in-depth criticism of Illinois Supreme Court Rule 23’s publication guidelines.

Rule 23 provides for an opinion’s publication only where a majority of the panel deems a decision one that “establishes a new rule of law or modifies, explains, or criticizes an existing rule of law” or “resolves, creates, or avoids an apparent conflict of authority within the Appellate Court.” Sup. Ct. R. 23(a).

Hyman’s thesis is that these standards are too arbitrary and the Rule should be changed so that just one justice, instead of a majority of the panel, is all that’s needed to have a decision published.  Hyman then espouses the benefits of dissents and special concurrences; they perform the valuable functions of clarifying, questioning and developing the law.

In its current configuration, Rule 23 arbitrarily allows a majority of judges to squelch lone dissenters and effectively silence criticism.  Judge Hyman advocates for Illinois to follow multiple other courts’ lead and adopt a “one justice” rule (a single judge’s request warrants publication).  By implementing the one justice rule, minority voices on an appeals panel won’t so easily be squelched and will foster legal discourse and allow the competing views to “hone legal theory,

By implementing the one justice rule, minority voices on an appeals panel won’t so easily be squelched and will foster legal discourse and allow the competing views to “hone legal theory, concept and rule.”

 

 

‘Inquiry Notice’ Element of Discovery Rule Dooms Plaintiff’s Fraud in Inducement Claim – IL First Dist.

The First District recently discussed the reach of the discovery rule in the course of dismissing a plaintiff’s fraud claims on statute of limitations grounds.

The plaintiff in Cox v. Jed Capital, LLC, 2016 IL App (1st) 153397-U, brought a slew of business tort claims when he claimed his former employer understated its value in an earlier buy-out of the plaintiff’s LLC interest.

Plaintiff’s 2007 lawsuit settled a year later and was the culmination of settlement discussions in which the defendants (the former employer’s owner and manager) produced conflicting financial statements.  The plaintiff went forward with the settlement anyway and released the defendants for a $15,000 payment.

In 2014, after reading a Wall Street Journal article that featured his former firm, plaintiff learned the company was possibly worth much more than was previously disclosed to him.  Plaintiff sued in 2015 for fraud in the inducement, breach of fiduciary duty and breach of contract.

The trial court dismissed the claims on the basis they were time-barred by the five-year limitations period and the plaintiff appealed.  He argued that the discovery rule tolled the limitations period and saved his claims since he didn’t learn the full extent of his injuries until he read the 2014 article.

Result: Dismissal of plaintiff’s claims affirmed.

Q: Why?

A: A fraud claim is subject to Illinois’ five-year statute of limitations codified at Section 13-205 of the Code of Civil Procedure.  Since the underlying financial documents were provided to the plaintiff in 2008 and plaintiff sued seven years later in 2015.  As a result, plaintiff’s claim was time-barred unless the discovery rule applies.

In Illinois, the discovery rule stops the limitations period from running until the injured party knows or reasonably should know he has been injured and that his injury was wrongfully caused.

A plaintiff who learns he has suffered from a wrongfully caused injury has a duty to investigate further concerning any cause of action he may have.  The limitations period starts running once a plaintiff is put on “inquiry notice” of his claim.  Inquiry notice means a party knows or reasonably should know both that (a) an injury has occurred and (b) it (the injury) was wrongfully caused.  (¶ 34)

Fraud in the inducement occurs where a defendant makes a false statement, with knowledge of or belief in its falsity, with the intent to induce the plaintiff to act or refrain from acting on the falsity of the statement, plaintiff reasonably relied on the false statement and plaintiff suffered damages from that reliance.

Plaintiff alleged the defendants furnished flawed financial statements to induce plaintiff’s consent to settle an earlier lawsuit for a fraction of what he would have demanded had he known his ex-employer’s true value.  The Court held that since the plaintiff received the conflicting financial reports from defendants in 2008 and waited seven years to sue, his fraud in the inducement claim was untimely and properly dismissed.

Afterwords:

This case paints a vivid portrait of the unforgiving nature of statutes of limitation.  A plaintiff has the burden of establishing that the discovery rule preserves otherwise stale claims.  If a plaintiff is put on inquiry notice that it may have been harmed (or lied to as the plaintiff said here), it has a duty to investigate and file suit as quickly as possible.  Otherwise, a plaintiff risks having the court reject its claims as too late.

‘Domicile’ vs. ‘Residence’ vs. ‘Citizenship’ in Federal Court Jurisdiction – More Semantic Hairsplitting?

Strabala v. Zhang, 318 F.R.D. 81 (Ill. N.D. 2016), featured here for its detailed discussion of e-mail evidence, provides an equally thorough analysis of the differences between residence and domicile in the Federal court jurisdiction calculus.

In the Federal litigation scheme, the party asserting Federal court jurisdiction bears the burden of proving subject matter jurisdiction by a preponderance of the evidence.

The plaintiff here alleged that the Northern District had original jurisdiction based on 28 U.S.C. § 1332(a)(2) – the diversity of citizenship statute that vests Federal courts with jurisdiction over claims between “citizens of a State and citizens or subjects of a foreign state.”

The defendants were unquestionably Chinese citizens – a foreign state under Section 1332.  The plaintiff’s citizenship, though, was unclear.  While plaintiff claimed he was a citizen of Illinois, the defendants disputed this; they pointed to the plaintiff’s home in China as proof that he wasn’t really an Illinois citizen and so was stateless.  A “stateless” citizen can’t invoke Federal court diversity jurisdiction.

Though colloquially used interchangeably, under Federal law, the terms citizenship and residence have important differences.  Citizenship equals domicile, not residence.  The term residence denotes where a person lives while domicile carries both a physical and mental dimension.

Domicile is “the place where that individual has a true, fixed home and principal establishment” and the place where the person intends to eventually return.  A person can have multiple residences but only one domicile.

Objective factors a court considers to determine domicile include “current residence, voting registration and voting practices, location of personal and real property, location of financial accounts, membership in unions and other associations, place of employment, driver’s license and automobile registration, and tax payments.”  But no lone citizenship/domicile factor is conclusive; each case turns on its own facts.

Applying these factors, the Court noted that since plaintiff was based in Illinois from the late 1980s through 2006 (when plaintiff moved first to Houston, TX then to Shanghai), the Court required defendants to show that plaintiff not only currently lived outside of Illinois but also had no intention of returning to Illinois.

The Court credited the plaintiff’s declaration (sworn statement) of intent to keep an Illinois domicile.  Other factors weighing in favor of finding subject matter jurisdiction included (1) plaintiff and his wife never sold there Chicago condominium or removed furniture from it when they moved to Houston in 2006, (2) for several months they lived in corporate housing provided by plaintiff’s Houston employer (an architecture firm), (3) plaintiff’s wife divided her time equally between Chicago and Houston while plaintiff spent about 50% of his time in Shanghai, 40% in Houston and 10% in Chicago.

The plaintiff’s Texas drivers’ license and Houston condo purchase weren’t enough to tilt the citizenship question to the defendants (who, again, argued that the plaintiff wasn’t an Illinois citizen) since the plaintiff swore under oath that he intended to keep an Illinois domicile and defendant had no facts to refute this.

Rejecting the defendants’ argument that plaintiff’s domicile was Shanghai, the Court focused on the following facts: (1) plaintiff lived in a furnished hotel with a lease of one year or less and owned no real property or car in Shanghai, (2) plaintiff’s Chinese work permit had to be renewed annually; and (3) plaintiff’s wife spent six months out of the year in Chicago.

Other pro-Illinois domicile factors cited by the Court included the plaintiff’s testimony (via declaration) that he has had a landline telephone number with a Chicago area code for over two decades and plaintiff’s LinkedIn profile that listed his employment locations as Shanghai, Seoul, and Chicago.

Afterwords:

For Federal subject matter jurisdiction based on diversity of citizenship to attach, the plaintiff must be a citizen of a State (as opposed to a foreign country).  This case provides an exhaustive application of the various factors a court considers when deciding the site of a Federal plaintiff’s domicile in a complex fact pattern and emphasizes the differences between residence and domicile.

 

 

Indirect Evidence of E-mail Authenticity Not Enough in Architect’s Defamation Suit – IL ND (Part I of II)

An Illinois Federal court recently expanded on the reach of some common business torts, the grounds to vacate a default judgment, and the evidentiary vagaries of e-mail.

Strabala v. Zhang, 318 F.R.D. 81 (Ill. N.D. 2016), pits an architect against his former partners in a defamation and tortious interference suit based on accusations of unethical conduct and the diversion of partnership assets to foreign businesses.

The plaintiff alleged the defendants e-mailed plaintiff’s professional associates and falsely accusing him of forging signatures, pilfering software and tax fraud, among other things.

After a default judgment entered against them, the former partners moved to vacate the judgment and separately moved to dismiss the plaintiff’s suit for lack of subject matter and personal jurisdiction.

The court vacated the default judgment and partially granted the defendants’ motion to dismiss.  Some highlights of the court’s opinion:

Federal Rules 55 and 60 respectively allows a court to set aside a default order and default judgment.  These rules further the policy of having cases decided on their merits and not technicalities.

A party seeking to vacate an entry of default prior to the entry of final judgment must show: (1) good cause for the default; (2) quick action to correct it; and (3) a meritorious defense to the complaint.  The court found that the defendants satisfied the three-prong standard to vacate the default.

E-mail Evidence: Foundational Rules

The defendants sought to offer two emails into evidence – one allegedly sent by the plaintiff, the other received by him.

To lay a foundation for documentary evidence, the proponent (here the defendants) must submit evidence “sufficient to support a finding that the item is what the proponent claims it is.”  FRE 901(a).  The foundational standard is lenient. The proponent must only make a prima facie showing of genuineness; it is up to the court or jury to decide whether the evidence is truly authentic.

Here, the defendants failed to lay a foundation for the e-mails.  First, the plaintiff – variously, author and recipient of the e-mails – testified that he believed the e-mails may have been altered and did not concede their authenticity.

Next, the Court rejected Defendants’ argument that the e-mails were self-authenticating under FRE 902(7) – the rule governing inscriptions, signs, tags, or labels that indicate business origin, ownership, or control.

The court found that plaintiff’s electronic e-mail signature and a company letterhead logo were not “trade inscriptions” within the meaning of Rule 902(7) citing to a Seventh Circuit case holding that a trade inscription on the cover of an owner’s manual does not authenticate the contents of the manual.

Plaintiff rebutted the emails’ authenticity by testifying via declaration that he never electronically signed one e-mail and that the other e-mail was stored on his laptop’s hard drive – which a plaintiff claimed the defendants stole from him.

The court held that if the e-mails did originate from plaintiff’s stolen laptop, the evidence would be inadmissible since the laptop would be in defendants’ possession.

Q: So what kind of evidence would have satisfied the court?

A: Direct proof of authenticity.

Q: What would qualify as “direct proof”?

A: Testimony by Plaintiff or the other sender or someone who witnessed the sending of the emails who could attest that the questioned e-mails are the actual, unchanged emails sent by the authors.

The court noted that indirect evidence of authenticity could also work.  Indirect evidence typically involves testimony from “someone who personally retrieved the e-mail from the computer to which the e-mail was allegedly sent” together with other circumstantial evidence such as the e-mail address in the header and the substance of the email itself.

Here, the court found the defendants’ indirect evidence was too flimsy. It noted that the defendants were interested parties and accused of theft (plaintiff claimed they stole his laptop).  The court also held that the defendants’ self-serving testimony that they didn’t alter the e-mails wasn’t enough to establish their authenticity especially in light of plaintiff’s claims that the defendants stole his laptop and that the e-mails appeared to have been changed.

In the end, the court granted the plaintiff’s motion to strike the two e-mail exhibits to the defendants’ motion to dismiss.

Take-aways:

Given the rampantness of e-mail, this case is instructive for litigators since most cases will involve at least some e-mail evidence.  The case also underscores that while the standard for evidence authenticity is low, it still has some teeth.

Here, the plaintiff’s belief that the emails offered against him were doctored coupled with the fact that the e-mails’ source was stolen property (a laptop), was enough to create a question as to whether the e-mails were authentic.

The next post summarizes the Court’s exhaustive analysis of subject matter and personal jurisdiction under the Illinois long-arm statue and Federal due process standards.

Commercial Landlord Not Obligated to Accept Substitute Tenant Where No Sublease Offered – IL 1st Dist.

When a commercial tenant’s business is failing, it’s fairly common for the tenant to tender a sublessee to the landlord as a way to avoid a future damages lawsuit and judgment.

Gladstone Group I v. Hussain, 2016 IL App (1st) 141968-U, examines when a non-breaching landlord must accept a proposed sub- or new tenant from a defaulting lessee and what conduct satisfies the landlord’s duty to mitigate damages.

When the corporate tenant’s barbecue restaurant foundered, the landlord sued the lease guarantors to recover about $60K in unpaid rent.  At trial, the guarantors provided written and oral evidence that it offered three potential subtenants to the landlord – all of whom were refused by the landlord.

The trial court found that the landlord violated the lease provision prohibiting the landlord from unreasonably refusing consent to a sublease offered by the tenant.  Critical to the trial court’s ruling was the fact that the tenant proposed a subtenant who offered to pay $7,500 per month – only about $800 less than the monthly sum paid by the defaulting tenant.

The landlord appealed.  It argued that the lease did not require landlord to accept an offer that wasn’t an actual sublease or to agree to accept less rent than what a breaching tenant owed under a lease.

Held: Reversed

Reasons:

The critical fact was that no prospective tenant contacted by the defendant submitted a sublease to the landlord.  Instead, all that was given were “offers” to lease the premises. There was no evidence that any of the businesses that submitted offers were ready willing and able to step into defendant’s shoes.  While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.

While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.

Since the tenant failed to carry its burden of proving the subtenant’s present ability to take over the lease, the Court found that the landlord was within its rights to refuse the different subtenant’s overtures.  The appeals court remanded the case so the trial court could decide whether the landlord satisfied its duty to mitigate since the evidence was conflicting as to the landlord’s post-abandonment efforts to re-let the premises. (¶¶ 23-25)

The dissenting judge found that the landlord failed to satisfy its duty to mitigate damages.  It noted trial testimony that for several months from the date tenant vacated the property, the landlord did nothing.  It didn’t start showing the property to prospective tenants until several months after the tenant’s abandonment.

The dissent also focused on the landlord’s refusal to meet with or follow-up with the three prospects brought to it by the defaulting tenant.  It cited a slew of Illinois cases spanning nearly five decades that found a non-breaching landlord met its duty to mitigate by actively vetting prospects and trying to sublease the property in question.  Here, the dissent felt that the landlord unreasonably refused to entertain a sublease or new lease with any of the three businesses introduced by the defendant.

Afterwords:

There is a legally significant difference between an offer to sublease and an actual sublease.  A defaulting tenant has the burden of proving that its subtenant is ready, willing and able to assume the tenancy.  If all the tenant brings to a landlord is an offer or a proposal, this won’t trigger the landlord’s obligation not to unreasonably refuse consent to a commercially viable subtenant.

A landlord who fails to promptly try to re-let empty property or who doesn’t take an offered subtenant seriously, risks a finding that it failed to meet its duty to mitigate its damages after a prime tenant defaults.

 

Procuring Cause Real Estate Broker Entitled to Quantum Meruit Commission – IL First Dist.

Halpern v. Titan Commercial, LLC, 2016 IL App (1st) 152129 examines commercial broker’s liens, the procuring cause doctrine and the quantum meruit remedy under Illinois law.

The Plaintiff property buyer sued to remove the defendant’s real estate broker’s lien after plaintiff bought Chicago commercial property from an owner introduced by the broker a few years prior.  Over a two-year span, the broker tried to facilitate plaintiff’s purchase the property by arranging multiple meetings and showings of the site.  The plaintiff ultimately bought the property through a consultant instead of the broker defendant. 

The plaintiff sued to stop the broker from foreclosing its broker’s lien and to quiet title to the parcel.  After the court entered a preliminary injunction for the plaintiff, the broker counterclaimed for breach of contract and quantum meruit.  After a bench trial, the broker was awarded $50,000 on its quantum meruit claim and Plaintiff appealed.

Result: Judgment for broker affirmed.

Rules/reasoning:

The court first upheld the trial court’s denial of the plaintiff’s claims for attorneys’ fees against the broker based on  Section 10(l) of the Commercial Broker’s Lien Act, 770 ILCS 15/1, et seq. (the “Act”).  This Act section provides that a prevailing party can recover its costs and attorneys’ fees.  A prevailing party is one who obtains “some sort of affirmative relief after [trial] on the merits.”

The appeals court held that the plaintiff wasn’t a prevailing party under the Act simply by obtaining a preliminary injunction.  Since the preliminary injunction is, by definition, a temporary (and preliminary) ruling, there was no final disposition of the validity of the defendant’s broker’s lien.

The court then focused on the procuring cause doctrine and related quantum meruit remedy.  Under the procuring cause rule, where a broker’s efforts ultimately result in a sale of property – even if consummated through a different broker – the first broker is the procuring cause and can recover a reasonable commission.

A broker is the procuring cause where he brings a buyer and seller together or is instrumental in the sale’s completion based on the broker’s negotiations or information it supplies. (¶ 18)

A procuring cause broker is entitled to a commission under a quantum meruit theory where a party receives a benefit from the broker’s services that is unjust for that party to retain – even where there’s no express contract between the parties.

Here, the plaintiff only knew of this off-market property based on defendant showing it to her and introducing her to the property owner.  Had it not been for defendant’s actions, plaintiff would have never known about the property.

What About Broker Abandonment?

A defense to a procuring cause claim is where a broker abandons a deal.  To demonstrate broker abandonment, a purchaser must offer evidence of the broker’s discontinuing its services but also the purchaser’s own abandonment of its intent to buy the property.

Here, neither the purchaser nor the broker exhibited an intention to abandon the deal.  The purchaser eventually bought the property and the broker continued trying to arrange plaintiff’s purchase for two-plus years.

The court credited the broker’s evidence as to a reasonable commission based on the property’s $4.2M sale price.  Two experts testified for the broker that a reasonable commission would be between 1% and 6%.  The trial court’s $50,000 award fell well within that range. (¶¶ 22-24)

Afterwords:

1/ Where a broker introduces a plaintiff to property she ultimately buys or the broker’s information is integral to the plaintiff’s eventual purchase, the broker can recover a reasonable commission even where plaintiff uses another broker (or buys it herself). 

2/ Quantum meruit provides a valuable fall-back remedy where there is no express contract between a broker and a buyer.  The broker can recover a reasonable commission (based on expert testimony, probably) so long as it proves the buyer derived a benefit from the broker’s pre-purchase services.

 

Business Lender States Fraud Claim Versus Corporation But Not Civil Conspiracy One in Loan Default Case – IL 1st Dist.

When a corporate defendant and its key officers allegedly made a slew of verbal and written misstatements concerning the corporation’s financial health to encourage a business loan, the plaintiff lender filed fraud and civil conspiracy claims against various defendants.  Ickert v. Cougar Package Designers, Inc., 2017 IL App (1st) 151975-U examines the level of specificity required of fraud and conspiracy plaintiffs under Illinois pleading rules.

The plaintiff alleged that corporate officers falsely inflated both the company’s current assets and others in the pipeline to induce plaintiff’s $200,000 loan to the company.  When the company failed to repay the loan, the plaintiff brought fraud and conspiracy claims – the latter based on the theory that the corporate agents conspired to lie about the company’s financial status to entice plaintiff’s loan.

The trial court granted the defendants’ motion to dismiss the fraud and conspiracy claims and the plaintiff appealed.

Partially reversing the trial court, the First District first focused on the pleading elements of common law fraud and the Illinois Code provision (735 ILCS 5/2-606) that requires operative papers to be attached to pleadings that are based on those papers.

Code Section 2-606 states that if a claim or defense is based on a written instrument, a copy of the writing must be attached to the pleading as an exhibit.  However, not every relevant document that a party seeks to introduce as an exhibit at trial must be attached to a pleading.

Here, while part of plaintiff’s fraud claim was predicated on a faulty written financial disclosure document, much of the claim centered on the defendants’ verbal misrepresentations.  As a consequence, the Court found that the plaintiff wasn’t required to attach the written financial disclosure to its complaint.

Sustaining the plaintiff’s fraud count against the corporate officer defendants (and reversing the trial court), the Court noted recited Illinois’ familiar fraud pleading elements: (1) a false statement of material fact, (2) knowledge or belief that the statement was false, (3) an intention to induce the plaintiff to act, (4) reasonable reliance on the truth of the challenged statement, and (5) damage to the plaintiff resulting from the reliance.

While silence normally won’t equal fraud, when silence is accompanied by deceptive conduct or suppression of a material fact, this is active concealment and the party concealing given facts is then under a duty to speak.

Fraud requires acute pleading specificity: the plaintiff must allege the who, what, where, and when of the misrepresentation.  Since the plaintiff pled the specific dates and content of various false statements, the plaintiff sufficiently alleged fraud against the corporate officers.

(¶¶ 22-26)

A valid civil conspiracy claim requires the plaintiff to allege (1) an agreement by two or more persons or entities to accomplish by concerted action either an unlawful purpose or a lawful purpose by unlawful means; (2) a tortious act committed in furtherance of that agreement; and (3) an injury caused by the defendant.  The agreement is the central conspiracy element.  The plaintiff must show more than a defendant had “mere knowledge” of fraudulent or illegal actions.  Without a specific agreement to take illegal actions, the conspiracy claim falls.

In the corporate context, a civil conspiracy claim cannot exist between a corporation’s own officers or employees.  This is because corporations can only act through their agents and any acts taken by a corporate employee is imputed to the corporation.

So, for example, if employees 1 and 2 agree to defraud plaintiff, there is no conspiracy since the employees are acting on behalf of the corporation – they are not “two or more persons.”  Since this case’s plaintiff pled the two conspiracy defendants were officers of the same corporate defendant, the trial court properly dismissed the conspiracy count. (¶¶ 29-30)

The appeals court also affirmed the trial court’s denial of the plaintiff’s motion to amend his complaint against the corporate defendant.  While the right to amend pleadings is liberally granted by Illinois courts, the right is not absolute.

In deciding whether to allow a plaintiff to amend pleadings, a court considers (1) whether the amendment would cure a defect in the pleadings, (2) whether the other party would be prejudiced or surprised by the proposed amendment, (3) whether the proposed amendment is timely, and (4) whether there were previous opportunities to amend.

Here, since the plaintiff failed multiple opportunities to make his fraud and conspiracy claims stick, the First District held that the trial court properly denied the plaintiff’s fourth attempt to amend his complaint.

Afterwords:

This case provides a useful summary of fraud’s heightened pleading elements under Illinois law.  It also solidifies the proposition that a defendant can’t conspire with itself: a there can be no corporation-corporate officer conspiracy.  They are viewed as one and the same in the context of a civil conspiracy claim.

The case’s procedural lesson is that while parties normally are given wide latitude to amend their pleadings, a motion to amend will be denied where a litigant has had and failed multiple chances to state a viable claim.

 

Cancelled Checks Admitted Into Evidence As Computerized Business Records Over Defendant’s Hearsay Objection – IL 4th Dist.

People v. Doggett, 2014 IL App (4th) 120773-U, examines the business records hearsay exception through the lens of a criminal elder abuse case where copies of cancelled checks were integral to the State’s case.

In affirming the defendant’s conviction, the Court answered some important questions concerning the admissibility of computer-generated records and when documents generated by a third party – as opposed to the defendant – fall within the scope of the business records rule.

The state sued an assisted-living home operator for elder abuse.  The prosecution claimed the operator took advantage of a resident by gaining control of his bank account and using the those funds to pay the defendants’ personal expenses.

At trial, over defendant’s hearsay and foundation objections, the prosecution offered copies of the resident’s bank statements and cancelled checks images that bore the defendant’s signature.  A jury found defendant guilty of financial exploitation of the elderly and the court later sentenced defendant to eight years’ imprisonment.  Defendant appealed.

Result: Conviction upheld.

Rules/Reasons:

Section 115-5(a) of the Code of Criminal Procedure tracks the language of Illinois Supreme Court Rule 236 – the analogous civil rule that governs admissibility of business records.

The rationale for the business records hearsay exception is two-fold: first, businesses generally are motivated to routinely keep accurate records and are unlikely to falsify them.  Second, a business’s credibility largely depends on “regular, prompt, and systematic nature of business records” and those records are relied on in the operation of a business.

To lay a foundation for a business record, the maker of the record doesn’t have to testify.  Nor does the records custodian have to testify.  A document created by a third party where that third party had authority to generate the document on the business’s behalf in the regular course of business is admissible under the business-record hearsay exception.

This is because a third-party’s record would useless to a business unless accurate and reliable.  Where a person receives an apparent business record then integrates and relies on it in day-to-day operations, the recipient can lay a foundation for the business record.

Computer-stored records, business records admission requires a showing that (1) the electronic computing equipment that stores the records is recognized as standard, (2) the data input into the system that generates the record is done in the regular course of business reasonably close in time to the happening of the recorded event, and (3) the foundation testimony establishes that the sources of information, method and time of preparation indicate its trustworthiness and justify its admission. (¶¶ 43-44)

Applying these rules, the court noted that banks routinely rely on information in checks to maintain customer accounts. (“If the information in checks were generally unreliable, then the entire banking system would fail.”)

Since UCC Section 4-406 requires banks to maintain copies of paid items for seven years, the court properly found that the cancelled check copies properly qualified as business records and were admissible over the defendant’s hearsay objection.

The appeals court also found that the cancelled checks satisfied the admissibility standards for computer-stored records.  It noted that the checks were routinely uploaded and kept in the bank’s “optical system” and done so close in time to the bank’s receipt of the check in question.

The Court also rejected the defendant’s argument that the checks offered into evidence were not relevant.  Relevant evidence is evidence that has a tendency to make the existence of a fact that is of consequence to the determination of the action more or less probable than it would be without the evidence.  While a handwriting expert can be used to opine on whether a defendant did or didn’t sign a document, expert testimony not required to authenticate a defendant’s signature.  See 735 ILCS 5/8-1501.  Code Section 8-1501 allows a judge or jury to compare a defendant’s disputed signatures with his known (admitted) ones.

While a handwriting expert can opine on whether a defendant did or didn’t sign a document, expert testimony isn’t required to authenticate a defendant’s signature.  See 735 ILCS 5/8-1501.  Code Section 8-1501 allows a judge or jury to compare a defendant’s disputed signatures with known (undisputed) ones.

Here, the jury had enough admitted handwriting examples to compare against the disputed signature to find the defendant more likely than not signed the back of the resident’s rent checks used at trial.

Afterwords:

1/ Business records are inherently trustworthy and so fall in the class of hearsay documents that are routinely admitted in evidence;

2/ Computer-stored business records must pass additional admissibility hurdles that focus on the integrity of the computing equipment; and

3/ No expert testimony needed to authenticate handwriting on a disputed document.

 

Plaintiff’s Damage Expert Barred in Tortious Interference Case Where Only Offering ‘Simple Math’ – IL Case Note

An auto body shop plaintiff sued an insurance company for tortious interference and consumer fraud.

The plaintiff in Knebel Autobody Center, Inc. v. Country Mutual Insurance Co., 2017 IL App (4th) 160379-U, claimed the defendant insurer intentionally prepared low-ball estimates to drive its policy holders and plaintiff’s potential customers to lower cost (“cut-rate”) competing body shops.  As a result, plaintiff claimed it lost a sizeable chunk of business.  The trial court granted the insurer’s motion for summary judgment and motion to bar plaintiff’s damages expert.

Result: Affirmed.

Reasons: The proverbial “put up or shut up” litigation moment,  summary judgment is a drastic means of disposing of a lawsuit.  The party moving for summary judgment has the initial burden of production and ultimate burden of persuasion.  A defendant moving for summary judgment can satisfy its burden of production either by (1) showing that some element of plaintiff’s cause of action must be resolved in defendant’s favor or (2) by demonstrating that plaintiff cannot produce evidence necessary to support plaintiff’s cause of action.  Once the defendant meets its burden of production, the burden shifts to the plaintiff who must then present a factual basis that arguably entitles it to a favorable judgment.

Under Illinois law, a consumer fraud plaintiff must prove damages and a tortious interference plaintiff must show that it lost specific customers as a result of a defendant’s purposeful interference.

Here, since the plaintiff failed to offer any evidence of lost customers stemming from the insurer’s acts, it failed to offer enough damages evidence to survive summary judgment on either its consumer fraud or tortious interference claims.

The court also affirmed the trial court’s barring the plaintiff’s damages expert.

In Illinois, expert testimony is admissible if the offered expert is qualified by knowledge, skill, training, or education and the testimony will assist the judge or jury in understanding the evidence.

Expert testimony is proper only where the subject matter is so arcane that only a person with skill or experience in a given area is able to form an opinion. However, “basic math” is common knowledge and does not require expert testimony. 

Illinois Evidence Rules 702 and 703 codify the expert witness admissibility standards.  Rule 702 provides that if “scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise.”

Rule 703 states that an expert’s opinion may be based on data perceived by or made known to the expert at or before the hearing. If the data is of a type reasonably relied upon by experts in a particular field, the underlying data supplied to the expert doesn’t have to be admissible in evidence.

Here, the plaintiff’s expert merely compared plaintiff’s loss of business from year to year and opined that the defendant’s conduct caused the drop in business.  Rejecting this testimony, the court noted that anyone, not just an expert, can calculate a plaintiff’s annual lost revenues.  Moreover, the plaintiff’s expert failed to account for other factors (i.e. demographic shifts, competing shops in the area, etc.) that may have contributed to plaintiff’s business losses.  As a result, the appeals court found the trial court properly barred plaintiff’s damages expert. (¶¶ 32-33)

Afterwords:

The case underscores the proposition that a tortious interference plaintiff must demonstrate a specific customer(s) stopped doing business with a plaintiff as a direct result of a defendant’s purposeful conduct.  A consumer fraud plaintiff also must prove actual damages resulting from a defendant’s deceptive act.

Another case lesson is that a trial court has wide discretion to allow or refuse expert testimony.  Expert testimony is not needed or allowed for simple math calculations.  If all a damages expert is going to do is compare a company’s earnings from one year to the next, the court will likely strike the expert’s testimony as unnecessary to assist the judge or jury in deciding a case.

 

Medical Device Maker Can Recover Lost Profits Against Double-Dipping Salesman – IL Fed. Court

A Federal court examines the pleading and proof elements of several business torts in a medical device company’s lawsuit against its former salesman and a rival firm.  The plaintiff sued when it learned its former employee was selling on the side for a competitor.

Granting summary judgment for most of the plaintiff’s claims, the Court in HSI v. Pappas, 2016 WL 5341804, dives deep into the various employer remedies where an employee surreptitiously works for a competing firm.

The Court upheld the plaintiff’s breach of fiduciary duty claim against the former salesman as well as its aiding and abetting (the breach) claim against the competitor.  In Illinois, a breach of fiduciary duty plaintiff must show (1) existence of a fiduciary duty, (2) the fiduciary duty was breached, and (3) the breach proximately caused plaintiff’s injury.  An employee owes his employer a duty of loyalty.  (Foodcomm Int’l v. Barry, 328 F.3d 300 (7th Cir. 2003).

A third party who aids and abets another’s breach of fiduciary duty can also be liable where the third party (1) knowingly participates in or (2) knowingly accepts the benefits resulting from a breach of fiduciary duty.encourages or induces someone’s breach of duty to his employer.

Since the plaintiff proved that the ex-salesman breached his duty of loyalty by secretly selling for the medical supply rival, the plaintiff sufficiently made out a breach of fiduciary duty claim against the salesman.  The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still reaped the benefits of his dual services.  The competitor’s agent admitted in his deposition that he knew the salesman was employed by plaintiff yet continued to make several sales calls with the plaintiff to customers of the competitor.  The court found these admissions sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still profited from his dual services.  The competitor’s representative admitted in his deposition knowing the salesman was employed by plaintiff yet still made several sales calls with the salesman to some of the competitor’s customers.  The court found this admission sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

With liability against the individual and corporate defendants established, the Court turned its attention to plaintiff’s damages.  Plaintiff sought over $400K in damages which included all amounts plaintiff paid to the defendant during his 10-month employment tenure, the amounts paid by the competitor to the defendant during his time with plaintiff as well as lost profits

An employee who breaches his fiduciary duties to an employer generally must forfeit compensation he receives from the employer.  The breaching employee must also disgorge any profits he gains that flow from the breach.

This is because under basic agency law, an agent is entitled to compensation only on the “due and faithful performance of all his duties to his principal.”  The forfeiture rule is equitable and based on public policy considerations.

Since the evidence was clear that the defendant failed to perform his employment duties in good faith, the Court allowed the plaintiff to recoup the nearly $180K in compensation it paid the defendant.

The plaintiff was not allowed to recover this amount from the competitor, however.  The Court held that since the payments to the salesman never came into the competitor’s possession, plaintiff would get a windfall if it could recover the same $180K from the competitor.

The Court also allowed the plaintiff to recover its lost profits from both the individual and corporate defendants.  In Illinois, lost profits are inherently speculative but are allowable where the evidence affords a reasonable basis for their computation, and the profits can be traced with reasonable certainty to the defendant’s wrongful conduct.

Since the corporate defendant didn’t challenge plaintiff’s projected profits proof, the Court credited this evidence and entered summary judgment for the plaintiff.

Take-aways:

This case serves as a vivid cautionary tale as to what lies ahead for double-dealing employees.  Not only can the employer claw back compensation paid to the employee but it can also impute lost profits damages to the new employer/competitor where it induces a breach or willingly accepts the financial fruits of the breach.

The case also cements proposition that lost profits are intrinsically speculative and that mathematical certainty isn’t required to prove them.

 

‘Original Writing’ Rule and Handwriting Evidence: Working Through the ‘Did Not!, Did So!’ Impasse

I once represented a commercial landlord in a case where the entire dispute hinged on whether a defendant signed a lease guaranty.  We said it did; the tenant said the opposite. Further complicating things was the fact that the lease was more than ten years old and no one saw the tenant sign the lease.  We ultimately settled on the day of trial so we never got to test whether the court would accept our circumstantial signature evidence.

Multiple legal authorities applied to the dispute.  The first admissibility hurdle we faced came via the best evidence or “original writing” rule.  This venerable doctrine adopts a preference that the original of a writing be produced when the contents of that writing are at issue.  Illinois Evidence Rule 1002; Jones v. Consolidation Coal Co., 174 Ill.App.3d 38 (1988).

To introduce secondary evidence of a writing, a party must first prove prior existence of the original, its loss, destruction or unavailability; authenticity of the substitute and his own diligence in attempting to procure the original.

The best evidence rule isn’t inviolable, though.  Illinois Evidence Rule 1003 provides that a duplicate is admissible to the same extent as an original unless (1) a genuine question is raised as to the authenticity of the original or (2) in the circumstances it would be unfair to admit the duplicate in lieu of the original.

Evidence Rule 1004 goes further and states that an original writing is not required and other evidence of a writing (or recording, or photograph) is admissible if (1) the original was lost or destroyed (but not in bad faith) (2) the original cannot be obtained via subpoena or other judicial process; (3) the original is in opponent’s possession and the opponent knew that the original would be needed at trial; or (4) the disputed document involves a collateral issue that is removed from the case’s controlling question.

Code Section 8-1501 also figured prominently in our lease guaranty dispute.  This statute (735 ILCS 5/8-1501) allows a court or jury to compare disputed signatures with known signatures and make a credibility determination as to whether a given defendant signed a contract.

While there is sparse case law interpreting this statute, 1601 South Michigan Partners v. Measuron, 271 Ill.App.3d 415 (1st Dist. 1995) stands as an interesting (though dated) case discussion of what evidence a court looks at when deciding whether a plaintiff met its burden of proving a defendant signed a contract.

In that case, also a lease dispute, the plaintiff attempted to offer the lease into evidence at trial over defendant/tenant’s objection.  The tenant claimed he never signed the lease and the plaintiff admitted not seeing the tenant sign it.  At trial, the landlord asked the court to compare the lease signature to the tenant’s admitted signature on a prior rent check.

The trial court directed a verdict for the tenant on the basis that the court was not a handwriting expert and not in a position to judge the genuineness of the lease.

Reversing, the appeals court held the plaintiff-landlord should have been allowed to introduce “lay” (non-expert) testimony that the tenant signed the lease.  Since there was evidence at trial that the tenant occupied the premises and plaintiff’s agent testified that he signed the lease and gave it to the tenant to sign, there was enough evidence to submit the signature authenticity question to the judge.

Since it was more likely than not that the tenant signed the lease based on the evidence at trial, the appeals court held that expert handwriting testimony wasn’t required and the trial court should have compared the disputed lease signature to the tenant’s signed rent check under Code Section 8-1501.

Take-aways:

In our case, we had offered multiple known signatures of the lease guarantors into evidence – including pleadings and discovery verifications filed in the case.  There was also no dispute that the defendant occupied the commercial space for several years.

Taken together, I believe this circumstantial proof of the guarantors’ signatures should have allowed the Court to compare the guaranty against defendants’ admitted signature samples and find in our favor.

 

Federal Court Gives Illinois Primer on Personal Property Torts

The plaintiff in Peco Pallet, Inc. v. Northwest Pallet Supply Co., 2016 WL 5405107 sued a recycling company under various theories after their once harmonious business relationship imploded.

The plaintiff, a wooden pallet manufacturer, instituted a program where it offered to pay pallet recyclers like defendant a specific amount per returned pallet.  When the plaintiff announced it was going to cut the per-pallet payment rate, the defendant recycler balked and refused to return several thousand of plaintiff’s pallets.  The plaintiff sued and the defendant filed counterclaims.

In partially dismissing and sustaining the parties’ various claims, the Court offers a useful refresher on both some common and uncommon legal theories that apply to personal property.

Replevin and Detinue

The Illinois replevin statute, 735 ILCS 5/19-101, allows a plaintiff to try to recover goods wrongfully detained by a defendant.  The statute employs a two-step process involving an initial hearing and a subsequent trial.

Once a replevin suit is filed, the court holds a hearing to determine whether to issue a replevin order.  If at the hearing the plaintiff shows he most likely has a superior right to possession of the disputed property and is likely to prevail at trial, the court enters an order of replevin which requires the defendant release the plaintiff’s property pending the trial.  If the plaintiff later wins at trial, he can recover money damages attributable to the defendant’s wrongful detention of the property.

Closely related to replevin, a detinue claim also seeks the recovery of personal property and damages for its wrongful detention.  Unlike replevin however, there is no preliminary hearing in a detinue case pending final judgment.  Possession remains with the defendant until final judgment.

Since the purpose of the replevin and detinue remedies is the return of personal property, where a defendant returns plaintiff its property, the claims are moot.  Here, since the defendant returned the 17,000 pallets that were subjects of the replevin suit, the Court found that the replevin and detinue claims pertaining to the returned pallets were moot.

The court did allow, however, plaintiff to go forward on its detinue claim for damages related to defendant’s failure to account for some 30,000 pallets.

Conversion

A conversion plaintiff must prove (1) a right to property at issue, (2) an absolute and unconditional right to immediate possession of the property, (3) a demand for possession, and (4) that defendant wrongfully and without authorization, assumed control, dominion or ownership over the property.

The essence of conversion is wrongful deprivation, not wrongful acquisition.  This means that even where a defendant initially possesses property lawfully, if that possession later becomes unauthorized, the plaintiff will have a conversion claim.

Here, the plaintiff alleged that it owned the pallets, that it demanded their return and defendant’s refusal to return them.  These allegations were sufficient to plead a cause of action for conversion.

 

Negligence

The Court also sustained the plaintiff’s negligence claim against the motion to dismiss.  In Illinois, a negligence action arising from a bailment requires allegations of (1) an express or implied agreement to create a bailment, (2) delivery of property to the bailee in good condition, (3) bailee’s acceptance of the property, and (4) bailee’s failure to return the property or its returning the property in damaged condition.

The plaintiff sufficiently alleged an implied bailment – that defendant accepted the pallets and failed to return some of the pallets while returning others in a compromised state.  These allegations were enough for the negligence count to survive.

Promissory Estoppel

The Court found that the defendant sufficiently pled an alternative promissory estoppel counterclaim.  Promissory estoppel applies where defendant makes a promise that the plaintiff relies on to its detriment.  The pleading elements of promissory estoppel are (1) an unambiguous promise, (2) plaintiff’s reliance on the promise, (3) plaintiff’s reliance was expected and foreseeable by defendant, (4) plaintiff relied on the promise to its detriment.

A promissory estoppel claim can’t co-exist with a breach of express contract claim: it only applies where there is no contractual consideration.  Here, the defendant/counter-plaintiff alleged there was no express contract.  Instead, it claimed that plaintiff’s promise to pay anyone who returned the pallets motivated defendant to return thousands of them.  The court viewed these allegations as factual enough for a colorable promissory estoppel claim.

Tortious Interference with Contract and Business Expectancy

The court dismissed the defendant’s tortious interference counterclaims.  Each tort requires a plaintiff to point to defendant’s conduct directed at a third party that results in a breach of a contract.  Here, the defendant’s counterclaim focused on plaintiff’s own actions in unilaterally raising prices and altering terms of its earlier pallet return program.  Since defendant didn’t allege any conduct by the plaintiff aimed at a third party (someone other than counter-claimant, e.g.), the tortious interference claims failed.

Take-aways:

1/ Conversion action can be based on defendant’s possession that was initially lawful but that later becomes wrongful;

2/ A Promissory estoppel claim can provide a viable fall-back remedy when there is no express contract;

3/ Tortious interference claim must allege defendant’s conduct directed toward a third party (someone other than plaintiff);

4/Where personal property is wrongfully detained and ultimately returned, the property owner can still have valid detinue claim for damages.

Food Maker’s Consumer Fraud Claim For Deficient Buttermilk Formula Tossed (IL ND Case Note)

The food company plaintiff in Kraft Foods v. SunOpta Ingredients, Inc., 2016 WL 5341809 sued a supplier of powdered buttermilk for consumer fraud when it learned that for over two decades the defendant had been selling plaintiff a buttermilk compound consisting of buttermilk powder mixed with other ingredients instead of “pure” buttermilk.

Granting the defendant’s motion to dismiss, the Northern District examines the “consumer nexus” requirement for consumer fraud liability and what conduct by a business entity can still implicate consumer concerns and be actionable under the Consumer Fraud Act, 815 ILCS 505/2 (the “CFA”).

The plaintiff believed it was receiving buttermilk product that wasn’t cut with other ingredients; it relied heavily on a 1996 product specification sheet prepared by defendant’s predecessor that claimed to use only pristine ingredients.

Upon learning that defendant’s buttermilk was not “pure” but was instead a hybrid product composed of buttermilk powder, whey powder, and dried milk, Plaintiff sued.

Dismissing the CFA claim, the Court rejected plaintiff’s argument that the ersatz buttermilk implicated consumer concerns since consumers were the end-users of the product and because consumer health and safety was possibly compromised.

The CFA offers broader protection than common law fraud.  Unlike its common law counterpart, the CFA plaintiff does not have to prove it actually relied on an untrue statement.  Instead, the CFA plaintiff must allege (1) a deceptive or unfair act or practice by defendant, (2) defendant’s intent that plaintiff rely on the deception or unfair practice, (3) the unfair or deceptive practice occurred during a course of conduct involving trade or commerce.

As its name suggests, the CFA applies specifically to consumers which it defines as “any person who purchases or contracts for the purchase of merchandise not for resale in the ordinary course of his trade or business but for his use or that of a member of his household.” 815 ILCS 505/1.  Where a CFA plaintiff is a business entity – like in this case – the court applies the “consumer nexus” test.  Under this test, if the defendant’s conduct is addressed to the market generally or otherwise implicates consumer protection concerns, the corporate plaintiff can have standing to sue under the CFA.

A classic example of conduct aimed at a business that still implicates consumer protection concerns is a defendant disparaging a business plaintiff or misleading consumers about that plaintiff.  But the mere fact that consumers are end product users normally isn’t enough to satisfy the consumer nexus test.  Here, defendants’ actions were twice removed from the consumer: Defendant supplied plaintiff with product who, in turn, incorporated defendant’s buttermilk product into its food offerings.

The Court also rejected plaintiff’s argument that defendant’s product imperiled “public health, safety or welfare issues.”  Since the plaintiff failed to plead any facts to show that defendant’s conduct affected, much less harmed, consumers, there was no consumer nexus (or connection) and plaintiff’s CFA claim failed.

Take-aways:

Even under relaxed Federal notice pleading standards, a consumer fraud plaintiff must still provide factual specifics in its Complaint.  The case illustrates that the consumer nexus test has some teeth.  Where the plaintiff is a sophisticated commercial entity and isn’t using a product as a consumer would, it will be tough for the plaintiff to show consumer protection concerns are involved.

 

Is It a New Contract Or Modification of an Existing One? Illinois Case Discusses Why It Matters

In business relationships that contemplate a series of reciprocal services, it’s at times unclear if extra services are being offered as a modification to an existing contract or are done as part of a new agreement.  Landmark Engineering v. Holevoet, 2016 IL App (1st) 150723-U examines this sometimes fine-line difference and illustrates in stark relief the importance of honoring contractual provisions that require contract changes to be in writing and signed by the parties.

The defendant hired the plaintiff under a written contract to do some engineering work including a soil study on a parcel of land the defendant was going to sell.  The plaintiff’s work would then be submitted to the governing county officials who would then determine whether the sale could go through.

The contract, drafted by plaintiff, had a merger clause requiring that all contract modifications be in writing and signed by the parties.  When the plaintiff realized the contract’s original scope of work did not satisfy the county’s planning authorities, the plaintiff performed some $50,000 in additional services in order to get county approval.

The plaintiff argued the defendant verbally authorized plaintiff to perform work in a phone conversation that created a separate, binding oral contract.  For her part, the defendant asserted that the extra work modified the original written contract and a writing was required to support the plaintiff’s additional invoices.

The defendant refused to pay plaintiff’s invoices on the basis that the extra work and accompanying invoice far exceeded the agreed-upon contract price.  Plaintiff sued and won a $52,000 money judgment at trial.

Reversing, the appeals court examines not only the reach of a contractual merger clause but also what constitutes a separate or “new” contract as opposed to only a modification of a pre-existing one.

In Illinois, a breach of oral contract claim requires the contract’s terms to be proven with sufficient specificity.  Where parties agree that a future written document will be prepared only to memorialize the agreement, that oral agreement is still binding even though the later document is never prepared or signed.

However, where it’s clear that the parties’ intent is that neither will be legally bound until a formal agreement is signed, no contract comes into existence until the execution and delivery of the written agreement.

Illinois law defines a  contractual “modification” as a change in one or more aspects of a contract that either injects new elements into the contract or cancels others out.  But with a modification, the contract’s essential purpose and effect remains static.  (¶¶ 35-36)

In this case, since the plaintiff submitted a written contract addendum (by definition, a modification of an existing agreement) to the defendant after their telephone conversation (the phone call plaintiff claimed was a new contract), and defendant never signed the addendum, am ambiguity existed concerning the parties intent.  And since plaintiff drafted both the original contract and the unsigned addendum, the ambiguity had to be construed in defendant’s favor under Illinois contract interpretation rules.

Since the unsigned addendum contained the same project name and number as the original contract, the appeals court found that the record evidence supported a finding that the addendum sought to modify the original contract and was not a separate, new undertaking.  And since defendant never signed the addendum, she wasn’t bound by it.

Afterwords:

The case serves as a cautionary tale concerning the perils of not getting the party to be charged to sign a contract.  Where one party fails to get the other to sign it yet still does work anyway, it does so at its peril.

Here, since both the original and unsigned addendum each referenced the same project name, description and number, the court found plaintiff’s extra work was done in furtherance of (and as a modification to) the original contract.  As the contract’s integration clause required all changes to be in writing, the failure of defendant to sign off on the addendum’s extra work doomed the plaintiff’s damage claims.

 

 

 

Non-Parties Can Enforce Sushi Restaurant Franchise Arbitration Clause – IL Court

(photo credit: https://www.amazon.com/SUSHI-SOCKS-Salmon-Tamago-Europe/dp/B0776Y99TY)

In a franchise dispute involving a sushi restaurant in the Chicago suburbs, the First District in Kim v. Kim, 2016 IL App (1st) 153296-U examines the scope of contractual arbitration clauses and when arbitration can be insisted on by non-parties to a contract.

The franchisee plaintiff sued the two principals of the franchisor for fraud.  He alleged the defendants tricked him into entering the franchise by grossly inflating the daily sales of the restaurant.  The plaintiff sued for rescission and fraud when the restaurant’s actual sales didn’t match the defendants’ pre-contract projections.  

The court dismissed the suit based on an arbitration clause contained in the franchise agreement and the plaintiff appealed.  He argued that since the defendants were not parties to the franchise agreement (the agreement was between plaintiff and the corporate franchisor), the defendants couldn’t use the arbitration clause as a “sword” and require the plaintiff to arbitrate his claims.

Affirming the case’s dismissal, the appeals court first discussed the burden-shifting machinery of a Section 2-619 motion to dismiss.  With such a motion, the movant must offer affirmative matter appearing on the face of the complaint or that is supported by affidavits.  Once the defendant meets this initial burden, the non-moving plaintiff must then establish that the affirmative matter is unfounded or requires the resolution of a material fact.  If the plaintiff fails to carry his burden, the motion to dismiss can be granted.  (¶ 23)

The court then zeroed in on whether the defendants – non-parties to the franchise agreement – could enforce the agreement’s arbitration clause against the plaintiff.  Generally, only parties to a contract can enforce its terms.  Non-parties can’t.  An exception to this rule is equitable estoppel.

For this exception to apply, (1) the signatory must rely on terms of a contract to make its claims against the nonsignatory, (2) the signatory must allege concerted misconduct by the nonparty and one or more contracting parties, and (3) there must be a connection between the alleged wrong, the non-party and the written contract terms.  (¶¶ 44-45)

Here, the crux of plaintiff’s lawsuit was that the defendants induced him into signing the franchise agreement and related restaurant lease.  Since the plaintiff’s claims were premised on the franchise agreement which contained a broad arbitration clause, the court held the plaintiff was subject to the arbitration clause and the defendants could enforce it.

Afterwords:

This case illustrates a situation where a non-party to a contract can still enforce it. Where a plaintiff’s claim against the non-party relates to or is factually intertwined with a written contract, an arbitration clause in that contract can be invoked by the non-party.

 

‘Bankruptcy Planning,’ Alone, Doesn’t Equal Fraudulent Intent to Evade Creditors – IL ND

A Northern District of Illinois bankruptcy judge recently rejected a creditor’s attempt to nix a debtor’s discharge for fraud.  The creditor alleged the debtor tried to escape his creditors by shedding assets before his bankruptcy filing and by not disclosing estate assets in his papers.  Finding for the debtor after a bench trial, the Court in Monty Titling Trust I v. Granrath, 15 AP 00826 illustrates the heavy burden a creditor must meet to successfully challenge a debtor’s discharge based on fraud.

The Court specifically examines the contours of the fraudulent conduct exception to discharge under Code Section 727(a)(2) and Code Section 727(a)(4)’s discharge exception for false statements under oath.

Vehicle Trade-In and Lease

The court found that the debtor’s conduct in trading in his old vehicle and leasing two new ones in his wife’s name in the weeks leading up to the bankruptcy filing was permissible bankruptcy planning (and not fraud).  Since bankruptcy aims to provide a fresh start to a debtor, a challenge to a discharge is construed strictly against the creditor opposing the discharge.  Under the Code, a court should grant a debtor’s discharge unless the debtor “with intent to hinder, delay or defraud a creditor” transfers, hides or destroys estate property.

Under the Code, a court should grant a debtor’s discharge unless the debtor “with intent to hinder, delay or defraud a creditor” transfers, hides or destroys property of the debtor within one year of its bankruptcy filing. 11 U.S.C. s. 727(a)(2)(A).  Another basis for the court to deny a discharge is Code Section 727(a)(4) which prevents a discharge where a debtor knowingly and fraudulently makes a false oath or account.

To defeat a discharge under Code Section 727(a)(2), a creditor must show (1) debtor transferred property belonging to the estate, (2) within one year of the filing of the petition, and (3) did so with the intent to hinder, delay or defraud a creditor of the estate.  A debtor’s intent is a question of fact and when deciding if a debtor had the requisite intent to defraud a creditor, the court should consider the debtor’s whole pattern of conduct.

To win on a discharge denial under Code Section 727(a)(4)’s false statement rule, the creditor must show (1) the debtor made a false statement under oath, (2) that debtor knew the statement was false, (3) the statement was made with fraudulent intent, and (4) the statement materially related to the bankruptcy case.

Rejecting the creditor’s arguments, the Court found that the debtor and his wife testified in a forthright manner and were credible witnesses.  The court also credited the debtor’s contributing his 401(k) funds in efforts to save his business as further evidence of his good faith conduct.  Looking to Seventh Circuit precedent for support, the Court found that “bankruptcy planning does not alone” satisfy Section 727’s requirement of intent.  As a result, the creditor failed to meet its burden of showing fraudulent conduct by a preponderance of the evidence.

Opening Bank Account Pre-Petition

The Court also rejected the creditor’s assertion that the debtor engaged in fraudulent conduct by opening a bank account in his wife’s name and then transferring his paychecks to that account in violation of a state court citation to discover assets.  

The court noted that the total amount of the challenged transfers was less than $2,000 (since the most that can be attached is 15% gross wages under Illinois’ wage deduction statute) and the debtor’s scheduled assets exceeded $4 million.  Such a disparity between the amount transferred and the estate assets coupled with the debtor’s plausible explanation for why he opened a new bank account in his wife’s name led the Court to find there was no fraudulent intent.

Lastly, the court found that the debtor’s omission of the bank account from his bankruptcy schedules didn’t rise to the level of fraudulent intent.  Where a debtor fails to include a possible asset (here, a bank account) in his bankruptcy papers, the creditor must show the debtor acted with specific intent to harm the bankruptcy estate.  Here, the debtor testified that his purpose in opening the bank account was at the suggestion of his bankruptcy lawyer and not done to thwart creditors.  The court found these bankruptcy planning efforts did not equal fraud.

Afterwords:

1/ Bankruptcy planning does not equate to fraudulent intent to avoid creditors.

2/ Where the amount of debtor’s challenged transfers is dwarfed by scheduled assets and liabilities, the Court is more likely to find that a debtor did not have a devious intent in pre-bankruptcy efforts to insulate debtor assets.

 

Amending Pleadings In Illinois: The Four-Factored Test – A Case Note

Illinois follows a policy of expansively allowing amendments to pleadings so cases can be decided on their merits instead of technicalities.  And while parties are generally given a lot of latitude to amend, the right to do so is not absolute.  The Court still has broad discretion to permit or disallow a request to amend.

Zweig v. Bozorgi Limited Partnership, 2016 IL App (1st) 152628-U, a business dispute lawsuit, provides a useful synopsis of Illinois’s governing pleading amendment factors and gives clues as to when a court exceeds its bounds in refusing an attempt to amend.

The Zweig plaintiff filed breach of contract, fiduciary duty and fraud counts against various defendants stemming from a failed partnership.  The plaintiff alleged he was tricked into investing $2M into a failed ambulatory surgical partnership.  The trial court first denied the plaintiff’s request to amend its complaint and then dismissed the complaint with prejudice.  Plaintiff appealed.

Reversing, the appeals court first stated the well-settled principles that govern pleading amendments in Illinois.  At any time before final judgment, a party can amend its pleading to change the parties, facts or causes of action.

The four factors a court considers when deciding whether to allow an amended pleading are: (1) whether the proposed amendment cures the defective pleading; (2) whether other parties would sustain prejudice or surprise by virtue of the proposed amendment; (3) whether the proposed amendment is timely; and (4) whether previous opportunities to amend could be identified.

The most important factor is the second one – whether there is prejudice or surprise to the opponent if the pleading is amended.  Prejudice is shown where a delay in seeking to amend leaves a defendant unprepared to defend a new theory at trial.  Where a defendant still has time to take discovery and prepare a defense, there will be no prejudice.

(¶¶ 12-13, 18-19)

In finding the trial court overreached in denying the plaintiff’s attempt to amend, the appeals court noted that in the early pleading stage, a plaintiff should be allowed to amend his complaint where the proposed amendment cures any defects in the current (prior) complaint.  The court also held there was no prejudice to the defendant since in the amended pleading, plaintiff was proceeding on the same legal claims he previously filed – he just amplified some of the key facts.

Addressing the third and fourth amendment to pleading factors, the Court found the proposed amended complaint timely since it was brought within one month of the filing date of the defendants’ motion to dismiss the prior Complaint.  In addition, this was only the plaintiff’s second request to amend and the first request was done only to preserve its appeal rights on an unrelated count.  Taken together, the four factors weighed in favor of allowing the plaintiff to amend its complaint.

Take-aways:

This case serves as a recent and relevant illustration of the pleading amendment guideposts in Illinois.  While a court has broad discretion to grant or deny a request to amend, that discretion still has some checks on it.

The case also teaches that if the denial of a motion to amend prevents a party from fully presenting its claim and if the opposing party has time to discover and defend against the amended pleading’s salient facts, there is likely no danger of prejudice or unfair surprise and the court should err on the side of allowing the proposed amendment.

 

Property Subject to Turnover Order Where Buyer Is ‘Continuation’ of Twice-Removed Seller – Corporate Successor Liability in Illinois

Advocate Financial Group, LLC v. 5434 North Winthrop, 2015 IL App (2d) 150144 focuses on the “mere continuation” and fraud exceptions to the general rule of no successor liability – a successor corporation isn’t responsible for debts of predecessor – in a creditor’s efforts to collect a judgment from a business entity that is twice removed from the original judgment debtor.

The plaintiff obtained a breach of contract judgment against the developer defendant (Company 1) who transferred the building twice after the judgment date. The second building transfer was to a third-party (Company 3) who ostensibly had no relation to Company 1. The sale from Company 1 went through another entity – Company 2 – that was unrelated to Company 1.

Plaintiff alleged that Company 1 and Company 3 combined to thwart plaintiff’s collection efforts and sought the turnover of the building so plaintiff could sell it and use the proceeds to pay down the judgment. The trial court granted the turnover motion on the basis that Company 3 was the “continuation” of Company 1 in light of the common personnel between the companies.  The appeals court reversed though.  It found that further evidence was needed on the continuation exception but hinted that the fraud exception might apply instead to wipe out the Company 1-to Company 2- to Company 3 property transfer.

On remand, the trial court found that the fraud exception (successor can be liable for predecessor debts where they fraudulently collude to avoid predecessor’s debts) indeed applied and found the transfer of the building to Company 3 was a sham transfer and again ordered Company 3 to turn the building over to the plaintiff. Company 3 appealed.

The appeals court affirmed the trial court’s judgment and in doing so, provided a useful summary of the principles that govern when one business entity can be held responsible for another entity’s debts.

In Illinois, a corporation that purchases the assets of another corporation is generally not liable for the debts or liabilities of the transferor corporation. The rule’s purpose is to protect good faith purchasers from unassumed liability and seeks to foster the fluidity of corporate assets.

The “fraudulent purpose” exception to the rule of no successor liability applies where a transaction is consummated for the fraudulent purpose of escaping liability for the seller’s obligations.

The “mere continuation” exception to the nonsuccessor liability rule requires a showing that the successor entity “maintains the same or similar management and ownership, but merely wears different clothes.”  The test is not whether the seller’s business operation continues in the purchaser, but whether the seller’s corporate entity continues in the purchaser.

The key continuation question is always identity of ownership: does the “before” company and “after” company have the same officers, directors, and stockholders?

In Advocate Financial, the factual oddity here concerned Company 2 – the intermediary.  It was unclear whether Company 2 abetted Company 1 in its efforts to shake the plaintiff creditor.  The court affirmed the trial court’s factual finding that Company 2 was a straw purchaser from Company 1.

The court focused on the abbreviated time span between the two transfers – Company 2 sold to Company 3 within days of buying the building from Company 1 – in finding that Company 2 was a straw purchaser. The court also pointed to evidence at trial that Company 1 was negotiating the ultimate transfer to Company 3 before the sale to Company 2 was even complete.

Taken together, the court agreed with the trial court that the two transfers (Company 1 to Company 2; Company 2 to Company 3) constituted an integrated, “pre-arranged” attempt to wipe out Company 1’s judgment debt to plaintiff.

Afterwords:  This case illustrates that a court will scrutinize property transfers that utilize middle-men that only hold the property for a short period of times (read: for only a few days).

Where successive property transfers occur within a compressed time window and the ultimate corporate buyer has substantial overlap (in terms of management personnel) with the first corporate seller, a court can void the transaction and deem it as part of a fraudulent effort to evade one of the first seller’s creditors.

Neighbors’ Constant Hoops Shooting Not ‘Objectively Offensive’ Enough to Merit Nuisance Liability – IL 4th Dist.

The Illinois 4th District recently bounced two homeowners’ lawsuit against their next-door neighbors for installing a basketball court on the neighbors’ property.  Fed up with the neighbor kids’ incessant basketball playing, the plaintiffs in Bedows v. Hoffman, 2016 IL App (4th) 160146-U sued for injunctive relief and damages.

The plaintiffs’ complaint alleged the basketball court violated written restrictive covenants that governed all homes in the neighborhood and that the defendants’ all-day (and much of the night) use of the court created a common law nuisance.

The trial court dismissed the plaintiffs’ claims and the plaintiffs appealed.

Affirming dismissal, the appeals court examines the key interpretative rules for residential restrictive covenants and the applicable standard of pleadings and proof for a nuisance claim.

In Illinois, restrictive covenants are construed and enforced according to their plain and unambiguous language;

The court’s goal in construing a restrictive covenant is to honor the parties’ intent at the time the covenant was made;

Covenants affecting real property are strictly construed so they don’t extend beyond their express language: all doubts as to whether a restriction applies is decided in favor of a landowner’s free use of property without restrictions

(¶¶ 56-57)

The court was tasked with deciding if a basketball court was a “building” – the property covenants barred any building (other than a single-family residence) within 10 feet of a property line.

Finding that the defendants’ basketball court was not a “building,” the Court looked to both Black’s and Webster’s dictionaries for guidance.  Each dictionary stated that walls, roof and an enclosed space were essential building components.  And since the basketball court had none of these elements, it didn’t meet the restrictions’ “building” definition.

A nuisance is a “substantial invasion of another’s interest in the use and enjoyment of his or her land.”  The invasion must be substantial (either intentional or negligent) and objectively (not subjectively) unreasonable.  To be actionable, the claimed nuisance must be physically offensive to the senses.  But “hypersensitive” individuals are not protected by nuisance law.

In addition, when a claim involves an activity deemed an accepted part of everyday life in a given community, it is especially hard to make out a nuisance case unless the plaintiff pleads unique facts that show how the challenged activity goes above and beyond what is commonplace.

Excessive noise can serve as the basis for a nuisance claim but it must be on the order of several dogs barking at all hours of the night.  A neighbor’s subjective annoyance at noise emanating from adjoining property isn’t extreme enough to merit nuisance relief under the law. (¶¶ 84-87)

In dismissing the plaintiffs’ nuisance claim, the Court first found that playing basketball didn’t qualify as “noxious or offensive” conduct under the covenants.  (The covenants outlawed noxious or offensive resident conduct.)  The Court also held that the plaintiffs failed to allege how the defendants’ use of the basketball court was any different from basketball playing by other neighborhood kids as the plaintiffs could document only a single instance of the defendants’ playing basketball after 10 p.m.

The Court noted that the plaintiffs failed to allege how the defendants’ use of the basketball court was any different from other kids’ court use as plaintiffs documented only a single instance where defendants’ played basketball after 10 p.m.

The Court then rejected the plaintiffs’ other covenant-based claim based on the “Allowable Structure” covenant that allowed property owners to erect single-family dwellings only on their lots.  Since a basketball court didn’t fit the dictionary definition of a structure (“a construction, production or piece of work”, i.e.), the Allowable Structure stricture didn’t apply.

Afterwords

This case illustrates how courts generally don’t like to meddle in private landowner disputes.  While the court does give some clues as to what is actionable nuisance under the law, the challenged conduct must go beyond everyday activity like playing basketball in a residential subdivision.

 

 

Evidence Rules Interplay – Authenticating Facebook Posts and YouTube Videos

Evidence Rules 901, 803 and 902 respectively govern authentication generally, the foundation rules for business records, and “self-authenticating” documents at trial.

The Fourth Circuit recently examined the interplay between these rules in the context of a Federal conspiracy trial.  In  United States v. Hassan, 742 F.3d 104 (4th Cir. Feb. 4, 2014), the Fourth Circuit affirmed a jury’s conviction of two defendants based in part on inflammatory, jihad-inspired Facebook posts and YouTube training videos attributed to them.

The Court first held that the threshold showing for authenticity under Rule 901 is low.  All that’s required is the offering party must make a prima facie showing that the evidence is what the party claims it is.  FRE 901(a).  In the context of business records, Rule 902(11) self-authenticates these records where they satisfy the strictures of Rule 803(6) based on a custodian’s certification.  Rule 803(6), in turn, requires the offering party to establish that (a) the records were made at or near the time (of the recorded activity) by – or from information transmitted by  – someone with knowledge, (b) that the records were “kept in the course of a regularly conducted activity or business”; and (c) that making the records was a regular practice of the business. FRE 803(6)(a)-(c).

Applying these rules, the Court held that certifications from Google’s and Facebook’s records custodians established the foundation for the Facebook “wall” posts and YouTube terror training videos.  In addition, the Court found that the prosecution sufficiently connected the two conspiracy defendants to the Facebook posts and YouTube videos by tracing them to internet protocol addresses that linked both defendants to the particular Facebook and YouTube accounts that generated the posts.

Notes: For a more detailed discussion of Hassan as well as an excellent resource on social media evidence developments, see the Federal Evidence Review (http://federalevidence.com/blog/2014/february/authenticating-facebook-and-google-records)

 

Sole Proprietor d/b/a Auto Dealership Held Liable For Floor Plan Loan Default- IL 2d Dist.

The Illinois Second District brings into focus the perils of a business owner failing to incorporate in a car loan dispute in Baird v. Ogden Lincoln Mercury, Inc., 2016 IL App (2d) 160073-U.  Affirming judgment on the pleadings for the plaintiff lender in the case, the Court answers some important questions on the difference between corporate and personal liability and how judicial admissions in pleadings can come back to haunt you.

The plaintiff sued the individual defendant and two affiliated corporations for breach of contract and quantum meruit respectively, in the wake of a “floor plan” loan default.  The individual defendant previously signed the governing loan documents as “President” of Ogden Auto Group, an entity not registered in Illinois.  The corporate defendants consented to a judgment against them on the quantum meruit claim and the case continued on the lender’s contract claim versus the individual defendant.

The Court first rejected the individual defendant’s argument that the breach of contract claim “merged” into the quantum meruit confessed judgment against the corporate defendant.  While a breach of express contract claim normally cannot co-exist with an implied-in-law or quantum meruit claim, the plaintiff’s quantum meruit claim lay against different defendants than the breach of contract action: the breach of contract suit targeted only the individual defendant.  In addition, Illinois law permits multiple judgments in the same case and so the earlier quantum meruit judgment didn’t preclude a later money judgment.  See 735 ILCS 5/2-1301(a).

The Court then granting the plaintiff’s motion for judgment on the pleadings based on the defendant’s judicial admissions in his verified answer to the Complaint.

– Judicial admissions conclusively bind a party and include formal admissions in the pleadings that have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact.”

– Judicial admissions are defined as “deliberate, clear, unequivocal statements by a party about a concrete fact within that party’s knowledge” and will conclusively bind the party making the admission.

– A statement is not a judicial admission if it is a matter of opinion, estimate, appearance, inference, or uncertain summary.

– An admission in a verified pleading, not the product of mistake or inadvertence, is a binding, judicial admission.

– An unincorporated business has no legal identity separate from its owner and is deemed an asset of the responsible individual.  A sole proprietorship’s liabilities are imputed to the individual owner.  One who operates a business as a sole proprietor under several names remains one “person,” and is personally liable for all business obligations.

(¶¶ 31-32)

Here, the individual defendant admitted signing both floor plan loans on behalf of Ogden Auto Group, which is not a legally recognized entity.  Since Ogden Auto Group wasn’t incorporated, it was legally a non-entity and the individual defendant was properly found liable for the unpaid loan balances.

Afterwords:

1/ A business owner’s failure to incorporate can have dire consequences.  By not setting up a separate legal entity to run a business through, the sole proprietor remains personally liable for all debts regardless of what name he does business under;

2/ Verified admissions in pleadings are hard to erase.  Unless a party can show pure mistake or inadvertence, a verified pleading admission will bind the litigant and prevent him from later contradicting the admission.

 

Statute of Frauds’ ‘Goods Over $500’ Section Dooms Car Buyer’s Oral Contract Claim (IL First Dist.)

I’ve written here before on the Statute of Frauds (SOF) and how it requires certain contracts to be in writing to be enforceable.  I’ve also championed “MYLEGS” as a useful mnemonic device for dissecting a SOF issue.

M stands for ‘Marriage’ (contracts in consideration of marriage), Y for ‘Year’ (contracts that can’t be performed within the space of a year must be in writing), L for ‘Land’ (contracts for sale of interest in land), E for ‘Executorship’ (promises by a executor to pay a decedent’s creditor have to be in writing), G is for ‘Goods’ (contracts to sell goods over $500) and S for ‘Surety’ (a promise to pay another’s debt requires a writing).

The First District recently affirmed the trial court’s dismissal of a breach of contract based on the Uniform Commercial Code’s (UCC) SOF provision governing the sale of goods for over $500 (the “G” in the above MYLEGS scheme).

The plaintiff in Isenbergh v. South Chicago Nissan, 2016 IL App(1st) 153510 went to a car dealer defendant to buy a new Nissan Versa (Versa 1) with specific features (manual transmission, anti-lock brakes, etc.).  When told the requested car wasn’t in stock, the plaintiff opted to rent a used car temporarily until the requested car was available.  But instead of renting a used car, the Plaintiff alleged the dealership convinced him to enter into a verbal “Return Agreement” for a substitute Versa (Versa 2). 

Under the Return Agreement, the dealership promised to sell the plaintiff Versa 2 – which didn’t have plaintiff’s desired features – and then buy it back from Plaintiff when Versa 1 was in stock.  According to Plaintiff, the Return Agreement contemplated Plaintiff’s total payments on Versa 2 would equal only two months of sales contract installment payments.

Plaintiff claimed the dealership refused to honor the Return Agreement and Plaintiff was stuck making monthly payments on Versa 2 (a car he never wanted to begin with) that will eventually eclipse $28,000.  The trial court granted defendant’s Section 2-619 motion to dismiss Plaintiff’s breach of contract action based on the SOF.

Held: Affirmed.

Reasons:

The SOF requires that a contract for the sale of goods for the price of $500 or more be in writing to be enforceable. 810 ILCS 5/2-201.  A “contract for sale” includes both a present sale of goods as well as a contract to sell goods in the future.  A “sale” is the passing of title from seller to buyer for a price. 810 ILCS 5/2-106, 103.  “Goods” under the UCC are all things “movable” at the time of identification to the contract for sale. 810 ILCS 5/2-105.

The Return Agreement’s subject matter, a car, clearly met the UCC’s definitions of “goods” and the substance of the Return Agreement was a transaction for the sale of goods.  (The dealership promised to buy back Versa 2 from the Plaintiff once Versa 1 (the car Plaintiff wanted all along) became available.

Since Versa 2’s sale price was over $26,000 and plaintiff’s two payments under the Versa 2 purchase contract exceeded $1,100, Versa 2 easily met the SOF’s $500 threshold. Because of this, the Court found that the SOF defeated plaintiff’s claim for breach of an oral agreement to buy and sell a car selling for well over $500.

Afterwords:

This case presents a straightforward application of the SOF section governing the sale of goods that retail for at least $500.  Clearly, a motor vehicle is a movable “good” under the UCC and will almost always meet the $500 threshold by definition.

The case also makes clear that even if the contract contemplates a future sale and purchase (as opposed to a present one), the UCC still governs since the statute’s definition of sales contract explicitly speaks to contracts to sell goods in the future.

Finally, the case is a cautionary tale for car buyers and sellers alike as it shows that oral promises likely will not be enforced unless reduced to writing.

‘Integration’ Versus ‘Non-Reliance’ Clause: A ‘Distinction Without a Difference?’ (Hardly)

Two staples of sophisticated commercial contracts are integration (aka “merger” or “entire agreement”) clauses and non-reliance (aka “no-reliance” or “anti-reliance”) clauses. While sometimes used interchangeably in casual conversation, and while having some functional similarities, there are important differences between the two clauses.

An integration clause prevents parties from asserting or challenging a contract based on statements or agreements reached during the negotiation stage that were never reduced to writing.

A typical integration clause reads:

“This Agreement , encompasses the entire agreement of the parties, and supersedes all previous understandings and agreements between the parties, whether oral or written. The parties hereby acknowledge and represent that they have not relied on any representation, assertion, guarantee, or other assurance, except those set out in this Agreement, made by or on behalf of any other party prior to the execution of this Agreement. 

Integration clauses protect against attempts to alter a contract based on oral statements or earlier drafts that supposedly change the final contract product’s substance.  In litigation, integration/merger clauses streamline issues for trial and avoid distracting courts with arguments over ancillary verbal statements or earlier contract drafts.

Where integration clauses predominate in contract disputes, non-reliance clauses typically govern in the tort setting.  In fact, an important distinction between integration and non-reliance clauses lies in the fact that an integration clause does not bar a fraud (a quintessential tort) claim when the alleged fraud is based on statements not contained in the contract (i.e,. extra-contractual statements). *1, 2

A typical non-reliance clause reads:

“Seller shall not be deemed to make to Buyer any representation or warranty other than as expressly made in this agreement and Seller makes no representation or warranty to Buyer with respect to any projections, estimates or budgets delivered to or made available to Buyer or its counsel, accountants or advisors of future revenues, expenses or expenditures or future financial results of operations of Seller.  The parties to the contract warrant they are not relying on any oral or written representations not specifically incorporated into the contract.”  

No-reliance language precludes a party from claiming he/she was duped into signing a contract by another party’s fraudulent misrepresentation.  Unlike an integration clause, a non-reliance clause can defeat a fraud claim since “reliance” is one of the elements a fraud plaintiff must show: that he relied on a defendant’s misstatement to the plaintiff’s detriment.  To allege fraud after you sign a non-reliance clause is a contradiction in terms.

Afterwords:

Lawyers and non-lawyers alike should be leery of integration clauses and non-reliance clauses in commercial contracts.  The former prevents a party from relying on agreements reached during negotiations that aren’t reduced to writing while the latter (non-reliance clauses) will defeat one side’s effort to assert fraud against the other.

An integration clause will not, however, prevent a plaintiff from suing for fraud.  If a plaintiff can prove he was fraudulently induced into signing a contract, an integration clause will not automatically defeat such a claim.

Sources:

  1. Vigortone Ag Prods. v. AG Prods, 316 F.3d 641 (7th Cir. 2002).
  2. W.W. Vincent & Co. v. First Colony Life Ins. Co., 351 Ill.App.3d 752 (1st Dist. 2004)

 

Retailers’ Sales Forecasts Not Factual Enough to Buttress Fraud In Inducement Claim (IL ND)

The Northern District of Illinois provides a useful synopsis of Federal court summary judgment standards and the scope of some Illinois business torts in a dispute over a canceled advertising contract to sell hand tools.

The plaintiff in Loggerhead Tools, LLC v. Sears Holding Corp., 2016 WL 5111573 (N.D.Ill. 2016) sued Sears when it canceled an agreement to promote the plaintiff’s Bionic Wrench product and instead bought from plaintiff’s competitor.   The plaintiff claimed that after Sears terminated their contract, it was too late for the plaintiff to supply product to competing retailers.  Plaintiff filed a flurry of fraud claims alleging the department store giant made inflated sales forecasts and failed to disclose it was working with  plaintiff’s competitor.  Sears successfully moved for summary judgment on the plaintiff’s claims.

Summary Judgment Guideposts

Summary judgment is appropriate where the movant shows there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.  Courts deciding summary judgment must view the facts in the light most favorable to the nonmoving party only if there is a “genuine” dispute as to those facts.  A genuine fact dispute exists where a reasonable jury could return a verdict for the nonmoving party. 

The summary judgment movant has the initial burden of establishing an absence of a genuine fact dispute.  Once the movant meets this burden, it then shifts to the nonmovant/respondent who must point to specific evidence in the record that shows there is a genuine issue for trial.  But only “material” factual disputes will prevent summary judgment.  A fact is material where it is so important that it could alter the case’s outcome.

Fraud Analysis:

The crux of Plaintiff’s fraud suit was that Sears strung Plaintiff along by creating the false impression that Sears would market Plaintiff’s products.  Plaintiff alleged that Sears concealed its master plan to work with Plaintiff’s competitor and only feigned interest in Plaintiff until Sears struck a deal with a competing vendor.

An Illinois fraud plaintiff must show:  (1) defendant made a false statement of material fact, (2) defendant knew the statement was false, (3) the defendant intended the statement to induce the plaintiff to act, (4) the plaintiff justifiably relied on the statement’s truth, and (5) plaintiff suffered damages as a result of relying on the statement.

A bare broken promise doesn’t equal fraud.  An exception to this “promissory fraud” rule is where the defendant’s actions are part of a “scheme to defraud:” that is, the defendant’s actions are part of a pattern of deception.  The scheme exception also applies where the plaintiff can show the defendant did not intend to fulfill his promise at the time it was made (not in hindsight).

In determining whether a plaintiff’s reliance on a defendant’s misstatement is reasonable, the court looks at all facts that the plaintiff had actual knowledge of as well as facts the plaintiff may have learned through ordinary prudence.

Here, Sears’ sales forecasts were forward-looking, “promissory” statements of hoped-for sales results.  Sears’ profuse contractual disclaimers that sales forecasts were just “estimates” to be used “for planning purposes” only and “not commitments” prevented the Plaintiff from establishing reasonable reliance on the projections.

The court also rejected the plaintiff’s fraudulent concealment claim.  To prevail on a fraud claim premised on concealment of material facts, the plaintiff must show that the defendant had a duty to disclose the material fact.  Such a duty will arise where the parties have a special or fiduciary relationship that gives rise to a duty to speak.  

Parties to a contract are generally not fiduciaries.  Relevant factors to determine whether a fiduciary relationship exists include (1) degree of kinship of the parties, and (2) disparity in age, health, mental condition, education and business experience between the parties.

Here, there was no disparity between the parties.  They were both sophisticated businesses who operated at arms’ length from one another.

Afterwords: This case provides a good distillation of summary judgment rules, promissory fraud and the scheme to defraud exception to promissory fraud not being actionable.  It echoes how difficult it is for a plaintiff to plead and prove fraud – especially in the business-to-business setting where there is equal bargaining power between litigants.

This case provides a good distillation of summary judgment rules, promissory fraud and the scheme to defraud exception to the promissory fraud rule.  The case further illustrates the difficulty of proving fraud – especially in the business-to-business setting where there is equal bargaining power between the parties.

 

 

 

One Man’s ‘Outrage’ Is Another’s Petty Annoyance: Federal Court Tackles Promissory Fraud and Intentional Infliction Tort in Law Firm-Associate Spat

img_2052-3An Illinois Federal court expands on the contours of the IWPCA, promissory fraud, the employee vs. independent contractor dichotomy and the intentional infliction of emotional distress (IIED) tort in Lane Legal Services v. Le Brocq, 2016 WL 5955536,

The plaintiff law firm (“Firm”) sued a former associate (“Associate”) when he left to open his own law shop.  The Firm claimed the Associate stole firm business records, hacked into Firm computers and breached a written employment agreement.  The Associate fired back with multiple counterclaims against the Firm including ones for unpaid compensation under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq., fraud, and IIED.

IWPCA Claim

The Court denied the Firm’s motion to dismiss the Associate’s IWPCA count.  The IWPCA requires an employer to pay final compensation to a separated employee no later than the next regularly scheduled payday.  Independent contractors, in contrast to employees, aren’t covered by the IWPCA.

The key question when deciding whether someone is an employee or an independent contractor is the level of control exerted over the plaintiff.  The more autonomy a plaintiff has in performing his job functions, the more likely he is deemed an independent contractor and not subject to the IWPCA.

Associate attorneys are generally considered employees under the IWPCA.  While the Associate here had a unique relationship with the Firm in the sense he was entitled to a share of the Firm’s fees, the Court ultimately found the Associate was an employee under the statute as the Firm could still dictate the details of the Associate’s legal work. 

‘Promissory’ Fraud

The Court found the Associate alleged enough facts for his fraud counterclaim to survive the Firm’s motion to dismiss.  In Illinois, a common law plaintiff must plead (1) a false statement of material fact, (2) knowledge or belief by the speaker that a statement is false, (3) intent to induce the plaintiff to act, (4) action by the plaintiff in reliance on the statement, and (5) damages.

Where fraud is predicated on forward-looking/future statements, the claim is a non-actionable “promissory fraud.”  An exception to this rule lies where the fraudulent conduct is part of a scheme to defraud – an exception that governs where there is a pattern of deceptive conduct by a defendant.  As few as two broken promises can amount to a scheme of defraud although that is not the norm. (**6-7).

The court found that the Associate’s allegations that the firm falsely stated it supported him “leaving the nest” and starting his own firm knowing it would later retaliate against him for doing so was factual enough to beat the Firm’s motion to dismiss.

Intentional Infliction of Emotional Distress (IIED)

The Court dismissed the associate’s intentional infliction claims finding that the Firm’s conduct, while possibly vindictive, still wasn’t objectively extreme and outrageous enough to sustain an IIED action.

An IIED plaintiff must show: (1) extreme and outrageous conduct, (2) the defendant’s intent to inflict severe emotional distress or knowledge that there was a high probability his conduct would inflict such distress, and (3) the conduct caused severe emotional distress.  Whether conduct rises to the level of extreme and outrageous is judged on an objective standard based on the facts of a given case and must be more than insults, threats, indignities, annoyances or petty trivialities.  To be actionable, the conduct must be “unendurable by a reasonable person.”

Illinois courts especially disfavor applying the IIED tort to employment settings since nearly every employee could conceivably have a claim based on everyday work stressors.

The Court found that the Firm’s challenged actions – filing a frivolous suit and bad-mouthing the associate to regulatory bodies – while inappropriate and bothersome, didn’t amount to extreme and outrageous conduct that would be unbearable to a reasonable person.  As a result, the Court dismissed the associate’s IIED claim.

Take-aways:

(1) A plaintiff can qualify as an employee under the IWPCA even where he shares in company profits and performs some management functions.  If the employer sufficiently controls the manner and method of plaintiff’s work, he likely meets the employee test;

(2) While promissory fraud normally is not actionable, if the alleged fraud is part of a pattern of misstatements, a plaintiff may have a viable fraud claim – even where there is as few as two broken promises;

(3) A colorable intentional infliction claim requires a showing of extreme and outrageous conduct that go beyond harsh business tactics or retaliatory conduct.  If the conduct doesn’t demonstrate an overt intention to cause mental anguish, it won’t meet the objective outrage standard.

 

Uber and Lyft Users Unite! City of Chicago Beats Back Cab Drivers’ Constitutional Challenge to City Ridesharing Ordinance

An association representing Chicago taxicab drivers recently lost their attempt to invalidate a City of Chicago ridesharing ordinance as unconstitutional.

The crux of the cab drivers claim in Illinois Transportation Trade Ass’n v. City of Chicago, was that a City ordinance governing Transportation Network Providers (TNPs) like Uber and Lyft was too mild and didn’t subject TNPs to the same level of government oversight as Chicago cab drivers; especially in the areas of licensing and fair rates. (For example, TNPs are free to set their own rates by private contracts; something taxicabs can’t do.)

The cab drivers argued the Ordinance’s less onerous TNP strictures made it hard if not impossible for the City cabs to compete with TNPs for consumer business.

The Seventh Circuit struck down all of the plaintiffs claims and in doing so, discussed the nature of constitutional challenges to statutes in the modern, ridesharing context.

Deprivation of Property Right Without Compensation

The Court rejected the plaintiffs’ first argument that allowing TNPs to enter the Chicago taxicab market deprived plaintiffs of a property interest without compensation.

Finding that a protected property right does not include the right to be free from competition, the Court noted the City wasn’t depriving the plaintiffs of tangible or intangible property.  All the Ordinance did was codify Chicago cab drivers’ exposure to a new form of competition – competition from ridesharing services like Uber and Lyft.

And since the right to be free from competition is not a legally valid property right, the plaintiffs’ misappropriation of property theory failed.  The Court wrote that to indulge the plaintiffs’ argument that it had a property right in eliminating transportation service competition would give taxi drivers an unfair monopoly on all commercial transportation.

Equal Protection Claim: Cab Drivers and TNPs Should Be Subject to the Same Regulations

Striking down the plaintiffs’ equal protection claims, the Court framed the issue as whether “regulatory differences between Chicago taxicabs and Chicago TNPs are arbitrary or defensible.”  It found the regulatory variations were indeed defensible.  In reaching this holding the Court focused on the salient differences between taxicabs and TNPs including their distinct business models and levels of driver oversight and screening, as well as stark differences in consumer accessibility: where riders can hail a cab on any street, TNP users must first sign up with the TNP and install an app on their smartphone to hire TNP drivers.

A Dog Differs From a Cat and a Taxi Differs from a TNP Like Uber

In the end, it was the blatant qualitative differences between cab service and TNPs that carried the day and sealed the fate of plaintiffs’ constitutional challenge to the Ordinance.  The Court found there were measurable differences between taxis and TNPs in the areas of business model, driver screening and rate-setting, among others, that justified the City’s different regulatory schemes.

The Court found that the watered-down (according to Plaintiffs, anyway) TNP Ordinance rightly recognized the glaring differences between taxis and TNPs and was rationally related to the City’s interest in fostering competition in commercial transportation business.

Afterwords:

This case presents an interesting application of established constitutional equal protection principles to a progressive electronic commerce context.

In the end the case turned on whether leveling the competitive playing field to the cab drivers’ liking by striking down the Ordinance resulted in stifled competition.  Since the Court said the answer to the question was “yes,” the taxi drivers’ constitutional challenge failed.

 

 

Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.

 

 

Italian Lawsuit Filed Against Auto Repair Giant Dooms Later Illinois Lawsuit Under ‘Same Parties/Same Cause’ Rule

Where two lawsuits are pending simultaneously and involve the same parties and issues, the later filed case is generally subject to dismissal.  Illinois Code Section 2-619(a)(3) allows for dismissal where “there is another action pending between the same parties for the same cause.”

Midas Intern. Corp. v. Mesa, S.p.A., 2013 IL App (1st) 122048, while dated, gives a useful summary of the same-cause dismissal guideposts in the context of an international franchise dispute.

Midas, the well-known car repair company entered into a written contract with Mesa, an Italian car repairer, to license Midas’s business “System” and related trademarks.  In exchange for licensing Midas’s business model and marks, Mesa paid a multi-million dollar license fee and made monthly royalty payments.  The contract had a mandatory arbitration clause and a separate license agreement incorporated into it that fixed Milan, Italy or Chicago, Illinois as the venues for license agreement litigation.

Mesa sued Midas in an Italian court claiming Midas violated the license agreement by not making capital investments in some of Mesa’s projects.  A month or so later, Midas sued Mesa in Illinois state court for breach of contract and a declaratory judgment that Midas was in compliance with the license agreement and was owed royalties.  The trial court dismissed Midas’ suit based on the pending Italian lawsuit filed by Mesa.  Midas appealed.

Held: Affirmed.

Reasons:

The case turned on whether Mesa’s lawsuit stemmed from the same cause as Midas’s Illinois action.  Dismissal of an action under Code Section 2-619(a)(3) is a “procedural tool designed to avoid duplicative litigation.”  Under this section, actions involve the same cause when the relief sought in two cases rest on substantially the same set of facts.  The test is whether the two actions stem from the same underlying transaction or occurrence; not whether the pled causes of action or legal theories in the two cases are the same or different.

Two cases don’t have to be identical for Section 2-619(a)(3) to apply.  All that’s required is the cases feature a “substantial similarity of issues.”  (¶ 13)

If the same cause and same party requirements are met, the Court can still refuse dismissal if the prejudice to the party whose case is dismissed outweighs the policy against duplicative litigation.  In assessing prejudice caused by dismissal, the court considers issues of comity, prevention of multiplicity of lawsuits, vexation, harassment, likelihood of obtaining complete relief in the foreign forum, and the res judicata effect of a foreign judgment in the local forum (here, Illinois).

Courts also look to which case was filed first; although order of case filing isn’t by itself a dispositive factor.

Rejecting Midas’ argument that the Italian lawsuit was separated in time and topics from the Illinois lawsuit, the Court noted that Mesa’s lawsuit objective was to preemptively defend against Midas’s royalty claims.  Midas Illinois lawsuit, filed only weeks after Mesa’s action, sought damages under a breach of contract theory – that Mesa breached the license agreement by not paying royalties.

Since the outcome in the Mesa (Italian) case will determine the Midas (Illinois) case, the Court found the Illinois case was barred because Mesa’s action involved the same parties and same cause: both cases originated from the same license agreement.

The Court also found that Midas wouldn’t be prejudiced due to the dismissal of the Illinois action. Midas has the resources to file a counterclaim in the Italy case and the license agreement provides that either Milan or Chicago are possible lawsuit venues.  Since Illinois and Italy each had similar interests in and a connection to the dispute (the royalty payments were sent from Italy and received in Illinois), the trial court had discretion to dismiss Midas’ Illinois lawsuit. (¶ 25).

Afterwords:

1/ This case lays out the different factors a court considers when determining whether to dismiss an action under the same cause/same parties Code section;

2/ The timing of the filing of two lawsuits along with each forum’s connection to the dispute are key factors considered by the court when deciding whether avoiding redundancy in litigation trumps a party’s right to have its case heard on the merits.

Avvo’s ‘Sponsored Listings’ Not Commercial Enough to Escape First Amendment Protection in Lawyer’s Publicity Suit – IL ND

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In its decade old existence, Avvo, Inc., an “on line legal services marketplace,” has been no stranger to controversy.  Private attorneys and bar associations alike have objected to Avvo’s business model and practices – some filing defamation lawsuits against the company while others have demanded in regulatory venues that Avvo stop its unconsented “scraping” of attorney data.

Vrdolyak v. Avvo, Inc. is the latest installment of a lawyer suing Avvo; this time challenging Avvo-pro, the on-line directory’s pay-to-play service.

For about $50 a month, Avvo-pro users can ensure that no rival attorney ads appear on their profile page.  But if the attorney chooses not to participate in Avvo-pro, he will likely see competitor ads on his Avvo page.

The plaintiff, a non-Avvo-pro participant, sued Avvo under Illinois’ Right to Publicity Act.  He argued that by selling competitor ads on his profile page, Avvo usurped plaintiff’s right to monetize his identity.

In effect, according to plaintiff, Avvo was capitalizing on plaintiff’s brand and using it as a platform for rival lawyers to peddle their services to anyone who visited plaintiff’s Avvo page.

The Court granted Avvo’s motion to dismiss on the basis that Avvo’s ads were protected by the First Amendment to the U.S. Constitution.

The key inquiry was whether Avvo’s site constitutes commercial or non-commercial speech.  If speech is non-commercial, it is entitled to expansive First Amendment protection that can only be restricted in extraordinary circumstances.

Commercial speech, by contrast, receives less First Amendment protection.  It can be more easily scrutinized and vulnerable to defamation or publicity statute claims.

The court cited daily newspapers and telephone directory “yellow pages” as prototypical examples of non-commercial speech.

While both sell advertising, a newspaper’s and yellow pages’ main purpose is to provide information.  Any ad revenue derived by the paper or phone directory is ancillary to their primary function as information distributor.

Commercial speech proposes a commercial transaction, including through the use of a trademark or a company’s brand awareness.  If speech has both commercial and non-commercial elements (e.g. where a commercial transaction is offered at the same time a matter of social importance is discussed), the court tries to divine the main purpose of the speech by considering if (1) the speech is an advertisement, (2) it refers to a specific product and (3) the speaker’s economic motivation.

The Court agreed with Avvo that its site was akin to a computerized yellow pages; That the core of Avvo was non-commercial speech: it provides attorney information culled from various sources.

The court distinguished basketball legend Michael Jordan’s recent lawsuit against Jewel food stores for taking out an ad in Sports Illustrated, ostensibly for commending Jordan on his recent basketball hall of fame induction.

The Seventh Circuit there found that Jewel’s conduct clearly aimed to associate Jordan with Jewel’s brand and in the process promote Jewel’s supermarkets.  As a result, Jewel’s actions were deemed commercial speech and subject to a higher level of court scrutiny. Jordan v. Jewel Food Stores, Inc., 743 F.3d 509, 515 (7th Cir. 2014).

In the end, the Avvo case turned on this binary question: was Avvo a non-commercial attorney directory with incidental advertising, or was each Avvo attorney profile an advertisement for the competitors’ “Sponsored Listings” (the name ascribed to competing attorneys who paid for ads to be placed on plaintiff’s profile page).

Since not every attorney profile contained advertisements and none of the challenged ads used plaintiff’s name, the Court found Avvo was like a newspaper or yellow pages directory entitled to free speech protection.

The Court likened Avvo to Sports Illustrated – a publication that features ads but whose main purpose is non-commercial (i.e. Providing sports news).  Like SI, Avvo publishes non-commercial information – attorney stats – and within that information, places advertisements.

To hold otherwise and allow plaintiff’s publicity suit to go forward, “any entity that publishes truthful newsworthy information about….professionals, such as a newspaper or yellow page directory, would risk civil liability simply because it generated ad revenue” from competing vendors.

Afterword:  This case presents an interesting application of venerable First Amendment principles to the post-modern, computerized context.

A case lesson is that even if speech has some obvious money-making byproducts, it still  can garner constitutional protection where its main purpose is to impart information rather than to attract paying customers.

 

 

 

 

Non-reliance Clause Defeats Fraud In Inducement Claim In Employment Agreement Dispute – IL Court

Colagrossi v. Bank of Scotland, 2016 IL (App) 1st 142216 examines fraud in the inducement in an employment dispute involving parent and subsidiary companies and their respective successors.

The key question was whether a non-reliance clause in an employment contract barred a fraud in the inducement claim based on pre-contract statements by a party?  The answer:  “Yes.”

The case features a tortured procedural history and this tedious litigation timeline:

2005 – Plaintiff receives offer letter from Company 1 for plaintiff to perform futures trading services.  The offer letter contains a non-reliance clause that subsumes all oral representations concerning the offer letter’s subject matter.

2006 – Plaintiff enters into employment agreement with Company 2 – Company 1’s successor.  This agreement also has a non-reliance clause.

2006-2007 – Plaintiff contends that while negotiating the offer letter specifics, Company 1’s officer fails to disclose to Plaintiff that Company 1 is about to be sold to Company 2 and had plaintiff known this, he wouldn’t have accepted Company 1’s offer.

2008 – Plaintiff files two lawsuits.  He sues Company 1 for fraud in the inducement and then sues Company 2 under the same legal theories.  Company 2 removes that case to Federal Court (based on diversity of citizenship).

2011 – Plaintiff files a third lawsuit; this time naming Company 3 – Company 1’s parent – and Company 4, the entity that purchased Company 3.

2013 – Summary judgment for Company 1 is entered in the 2008 fraud in inducement case based on non-reliance language of offer letter.

2014 – Federal court grants summary judgment for Company 2 in removed Federal case (the removed 2008 case) based on same non-reliance clause

2014 – Plaintiff’s 2011 lawsuit against Companies 3 and 4 dismissed based on res judicata in that the same issues were already litigated in the 2008 fraud in inducement case against Company 1

Plaintiff appealed the dismissal of the 2011 lawsuit.

Held: Affirmed

Reasons:

Fraud in the inducement  requires a plaintiff to plead and prove (1) a false representation of material fact, (2) made with knowledge or belief in the representation’s falsity, (3) made with the purpose of inducing a plaintiff to act or refrain from acting, and (iv) the plaintiff reasonably relied on the defendant’s representation (or non-representation) to plaintiff’s detriment. (¶¶ 44-45)

Fraud normally is no defense to the enforceability of a written agreement where the party claiming fraud had ample opportunity to discover the fraud by reading the document.

Here, the plaintiff admitted that he read the 2005 offer letter and 2006 employment contract and signed them after reviewing with his attorney.  In addition, the two agreements each spelled out that plaintiff had not relied on any oral or written representations of the parties in signing the agreements. 

The Court held that the clear non-reliance language prevented plaintiff from establishing justifiable reliance on any oral statements made by Company 1 to induce plaintiff to sign the offer letter or on Company 2 statements before signing the employment agreement. (¶ 47)

The next question for the Court was whether summary judgment for Company 1 in the 2008 case was res judicata to the 2011 case against Companies 3 and 4.  Again, Company 3 was Company 1’s corporate parent and Company 4 purchased Company 3’s assets.

In Illinois, res judicata applies where (1) there is an identity of parties or their privies, (2) identity of causes of action, and (3) final judgment on the merits.

For the first, identity of parties prong, to apply, the parties don’t have to identical.  All that’s required is their interest must be sufficiently similar.  Under Illinois law, a corporate parent and its subsidiaries can be deemed sufficiently similar for res judicata purposes as can successor and predecessor companies.  When the only difference between a predecessor and a successor (like between Company 2 and 3 here) is a name change, “obvious privity” is present.  (¶¶ 53-54)

Since the two 2008 cases and the 2011 case all stemmed from the same underlying facts, involved the same employment contract and same corporate principals, summary judgment for Company 1 and 2 in the 2008 cases barred plaintiff from repackaging the same facts and claims against Companies 3 and 4 in the 2011 case.

Afterwords:

This case and others like it make clear that for a fraud in the inducement plaintiff to establish reliance in the breach of written contract setting, he should show he was deprived of a chance to read the contract.  Otherwise, the rule against allowing fraud claims by one who fails to read a document will defeat the claim.

Another important case holding is that the ‘same parties’ res judicata element applies where parent and subsidiary (or predecessor and successor) companies are sufficiently connected so they sufficiently represents the other’s legal interests in two separate lawsuits.

‘Helpful’ Client List Not Secret Enough to Merit Trade Secret Injunction – IL Court

Customer lists are common topics of trade secrets litigation.  A typical fact pattern: Company A sues Ex-employee B who joined or started a competitor and is contacting company A’s clients.  Company A argues that its customer list is secret and only known by Ex-employee B through his prior association with Company A.

Whether such a claim has legal legs depends mainly on whether A’s customer list qualifies for trade secret protection and secondarily on whether the sued employee signed a noncompete or nondisclosure contract. (In my experience, that’s usually the case.)  If the court deems the list secret enough, the claim may win.  If the court says the opposite, the trade secrets claim loses.

Novamed v. Universal Quality Solutions, 2016 IL App (1st) 152673-U, is a recent Illinois case addressing the quality and quantity of proof a trade secrets plaintiff must offer at an injunction hearing to prevent a former employee from using his ex-employer’s customer data to compete with the employer.

The plaintiff pipette (a syringe used in medical labs) company sued to stop two former sales agents who joined one of plaintiff’s rivals.  Both salesmen signed restrictive covenants that prevented them from competing with plaintiff or contacting plaintiff’s customers for a 2.5 year period and that geographically spanned much of the Midwest.  The trial court denied plaintiff’s application for injunctive relief on the basis that the plaintiff failed to establish a protectable interest in its clients.

Result: Trial court’s judgment affirmed.  While plaintiff’s customer list is “helpful” in marketing plaintiff’s services, it does not rise to the level of a protectable trade secret.

Rules/Reasoning:

Despite offering testimony that its customer list was the culmination of over two-decades of arduous development, the court still decided in the ex-sales employees’ favor.  For a court to issue a preliminary injunction, Illinois requires the plaintiff to show: (1) it possesses a clear right or interest that needs protection; (2) no adequate remedy at law exists, (3) irreparable harm will result if the injunction is not granted, and (4) there is a likelihood of success on the merits of the case (plaintiff is likely to win, i.e.)

A restrictive covenant – be it a noncompete, nondisclosure or nonsolicitation clause – will be upheld if is a “reasonable restraint” and is supported by consideration.  To determine whether a restrictive covenant is enforceable, it must (1) be no greater than is required to protect a legitimate business interest of the employer, (2) not impose undue hardship on the employee, and (3) not be injurious to the public.  (¶ 35)

The legitimate business interest question (element (1) above) distills to a fact-based inquiry where the court looks at (a) whether the employee tried to use confidential information for his own benefit and (b) whether the employer has near-permanent relationships with its customers.

Here, there was no near-permanent relationship between the plaintiff and its clients.  Both defendants testified that many of plaintiff’s customers simultaneously use competing pipette vendors.  The court also noted that plaintiff did not have any contracts with its customers and had to continually solicit clients to do business with it.

The court then pointed out that a customer list generally is not considered confidential where it can be duplicated or pieced together by cross-referencing telephone directories, the Internet, where the customers use competitors at the same time and customer names are generally known in a given industry.  According to the Court, “[i]f the information can be [obtained] by calling the company and asking, it is not protectable confidential information.” (¶ 40)

Since the injunction hearing evidence showed that plaintiff’s pipettes were typically used by universities, hospitals and research labs, the universe of plaintiff’s existing and prospective customers was well-defined and known to competitors.

Next, the court rejected plaintiff’s argument that it had a protectable interest because of the training it invested into the defendants; making them highly skilled workers. The court credited evidence at the hearing that it only takes a few days to teach someone how to clean a pipette and all pipette businesses use the same servicing method.  These factors weighed against trade secret protection attaching to the plaintiff’s customers.

Lastly, the court found that regardless of whether defendants were highly skilled workers, preventing defendants from working would be an undue hardship in that they would have to move out of the Midwest to earn a livelihood in their chosen field.

Afterwords:

This case provides a useful summary of what a plaintiff must show to establish a protectable business interest in its clients.  If the plaintiff cannot show that the customer identities are near-permanent, that they invested time and money in highly skilled workers or that customer names are not discoverable through basic research efforts (phone directories, Google search, etc.), a trade secrets claim based on ex-employee’s use of plaintiff’s customer list will fail.

Filing Lawsuit Doesn’t Meet Conversion Suit ‘Demand for Possession’ Requirement – 7th Cir. (applying IL law)

Conversion, or civil theft, requires a plaintiff to make a demand for possession of the converted property before suing for its return.  This pre-suit demand’s purpose is to give a defendant the opportunity to return plaintiff’s property and avoid unnecessary litigation.

What constitutes a demand though?  The easiest case is where a plaintiff serves a written demand for return of property and the defendant refuses.  But what if the plaintiff doesn’t send a demand but instead files a lawsuit.  Is the act of filing the lawsuit equivalent to sending a demand?

The Seventh Circuit recently answered that with a “no” in Stevens v. Interactive Financial Advisors, Inc., 2016 WL 4056401 (N.D.Ill. 2016)

The plaintiff there sued his former brokerage firm for tortious interference with contract and conversion when the firm blocked plaintiff’s access to client data after he was fired.

The District Court granted summary judgment for defendant on the plaintiff’s tortious interference claim and a jury later found judgment for defendant on plaintiff’s conversion suit.

At the conversion trial, the jury submitted this question to the trial judge: “Can we consider [filing] the lawsuit a demand for property?”

The trial judge answered no: under Illinois law, filing a lawsuit doesn’t qualify as a demand for possession.  The jury entered judgment for the defendant and plaintiff appealed.

Affirming the jury verdict, the Seventh Circuit addressed whether impeding a plaintiff’s access to financial data can give rise to a conversion action in light of Illinois’s pre-suit demand for possession requirement and various Federal securities laws.

To prove conversion under Illinois law, a plaintiff must show (1) he has a right to personal property, (2) he has an absolute and unconditional right to immediate possession of the property, (3) he made a demand for possession, and (4) defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.

The Court held that since the firm was bound by Federal securities laws that prohibiting it from disclosing nonpublic client information to third parties, coupled with plaintiff’s firing, the plaintiff could not show a right to immediate possession of the locked out client data.

The Seventh Circuit also agreed with the jury upheld the jury verdict on the insurance clients conversion suit based on the plaintiff’s failure to make a demand for possession.  The Court noted the plaintiff failed to demand the  return of his insurance client’s data before he sued.

And since Illinois courts have never held that the act of suing was a proxy for the required demand, the Seventh Circuit affirmed the jury verdict.

The Court also nixed the plaintiff’s “demand futility” argument: that a demand for possession would have been pointless given the circumstances of the given case. (Demand futility typically applies where the property has been sold or fundamentally damaged.)

The Seventh Circuit found that the jury properly considered the demand futility question and ruled against the plaintiff and there was no basis to reverse that finding.

Afterwords:

1/ A conversion plaintiff’s right to client data will not trump a Federal securities law protecting the data.  In addition, a pre-suit demand for possession is required to make out a conversion action unless the plaintiff can show that the demand is pointless or futile;

2/ Filing a lawsuit doesn’t dispense with the conversion tort’s demand for possession.

3/ A conversion plaintiff must make a demand for possession before suing even where the demand is likely pointless. Otherwise, the risk is too great that the lack of a demand will defeat the conversion claim.

 

Of Styx, Starbucks and A Drink Is Not A Beverage (??)

I remember being frantic one weeknight in the Fall of 1978. In a good way. My dad had picked me up from grade school (St. Thomas Aquinas – East Wichita, KS) in his Ice Blue Monte Carlo and together we trekked to David’s, the long shuttered department store in Wichita’s Parklane shopping mall. (I still recall the store’s ultra-catchy “D! A-V-I-D! Apostrophe S! – Come on into David’s!” ad jingle saturating local radio and television at the time.)

Nearing David’s and nearly hyperventilating with excitement, I was on the verge of buying my very first record album. Over the next few decades, I would accumulate well over a thousand records, cassettes, CDs and .mp3 singles. But Styx’s Pieces of Eight – the “Blue Collar Man” album, was my first record buy. And I do remember the event (to me it was an event given my life-long love of rock music and its history) like it was yesterday: the album’s plastic packaging, its glossy texture, the lemony smells of the store. All of it.

I had been on a mission to buy PoE ever since I heard “Renegade” on a Fourth Grade classmate’s K-Tel 8-track tape (showing my age alert!) a few weeks prior. The song was sandwiched between Amy Stewart’s “Knock on Wood” cover and Kansas’ “Point of No Return.” (That’s how much I listened to “Renegade” on my friend’s 8-track machine – I still remember – almost forty years later – the songs that both preceded and followed it with the same vividness as the song itself.)

PoE did not disappoint. Besides the mighty “Renegade,” some other choice PoE cuts include “Queen of Spades”, “Great White Hope,” and the title track. The aforementioned “Blue Collar Man,” still a rock radio staple and one of the most prominent in the Styx catalog, is yet another of PoE’s high-octane offerings. And so Styx became my favorite band. And I wore PoE out; listening to it on all days and at all hours.

Fast forward to the early 1980s and I was introduced to heavier fare like Maiden, Priest and Dio. My interest in Styx waned. I suspected, and peer pressure confirmed, that the band just wasn’t metal enough. A year or two later a classmate’s older brother played Into the Void’s  menacing, atonal intro and I was hooked. Black Sabbath would become my all-time metal gods. Styx and bands like it were relegated to afterthought status.

But not before 1981’s Paradise Theater and one of its top tracks, “Too Much Time on My Hands” burst into the pop music consciousness. An FM stalwart and iconic Early MTV offering, the song’s vaguely disco-tinged beat and electro-hand claps still trigger nostalgia pangs. I remember roller skating (!!) to the song at Skate East and Traxx – two venerable Wichita roller skating venues that long ago succumbed to the wrecking ball and internal detonations.

In the song, Tommy Shaw, the diminutive lead guitarist and Alabaman (I think), laments the perils of idle time and fair-weather compadres (“I got! dozens of friends and the fun never ends, that is as long as I’m buying…”) and even sprinkles in an incongruous Commander-in-Chief aspiration. (“Is it any wonder I’m not the President?“) So memorable is Too Much‘s video that even Jimmy Fallon, erstwhile SNL castmember and current Tonight Show host, gushed over it and did a verbatim sendup of the song with actor Paul “I Love You Man” Rudd.

I mention all this because today’s featured case – Forouzesh v. Starbucks Corp., (unfairly or not) reminds me of someone who clearly had…..tick tick tick (you guessed it)…. too much time on his hands.

The plaintiff, on his own and on behalf of all California residents who purchased a Starbucks cold drink in the past decade, sued the Seattle coffee titan for systemic fraud. He claimed Starbucks misrepresented the amount of fluid ounces in its cold drink offerings. Specifically, he claimed the coffee giant lied on its on-line menu about the amount of liquid in its drinks by underfilling its cups and adding ice to make the cups appear full. The plaintiff brought various common law and statutory fraud and breach of warranty claims in his lawsuit.

The California District Court dismissed the suit on Starbucks’ Rule 12(b)(6) motion. The Court noted that under Rule 8(a), a complaint must give a defendant fair notice of what a claim is and its basis. The complaint must meet a “plausibility standard” in which a complaint’s factual allegations are enough to raise a right to relief above the speculative level. A plaintiff must do more than simply allege labels, conclusions and a “formulaic recitation” of the elements of a given cause of action.

An action for fraud is subject to a more exacting pleading standard. Rule 9(b) requires a fraud plaintiff to allege underlying fraud facts with sharper specificity, including the time, place, persons involved, and content of the false statement.

Rejecting the plaintiff’s statutory consumer fraud and unfair competition claims, the Court found that a “reasonable consumer” would not likely be deceived by Starbucks’ website description of its cold drink measurements. Indeed, the Court held “but as young children learn, they can increase the amount of beverage they receive if they order “no ice.” Ouch?

And since young children could figure out that more ice means less liquid, the Court concluded that a reasonable consumer would not be deceived by Starbucks’ stated fluid ounce stats. Added support for the Court’s holding lay in the fact that Starbucks’ cold drink containers are clear. A consumer can clearly see that a given drink consists of both ice and liquid. If a consumer wants more liquid, he can simply order with “no ice.”

The Court’s finding of no deception also doomed the plaintiff’s common law fraud claims. It held that since a reasonable consumer would comprehend that Starbucks’ cold drinks contain both ice and liquid, the plaintiff could not establish either a misrepresentation by Starbucks or plaintiff’s justifiable reliance on it – two required fraud elements.

Lastly, the Court rejected the plaintiff’s state law breach of warranty claims. The Court found that Starbucks did not specifically state that its cold drinks contained a specific amount of liquid. All the coffee maker said – via its web page – was that it offered cold drinks for sale in various cup sizes (12 oz – Tall; 16 oz. – Grande, 24 oz. – Venti). Absent any specific allegations that Starbucks expressly or impliedly warranted that its cold drinks contained a specific amount of liquid, the plaintiff couldn’t make out a valid breach of warranty claim.

Afterwords: The plaintiffs’ failed fraud suit against Starbucks illustrates that while Federal pleading standards normally more relaxed than their State court counterparts, this isn’t so with fraud claims.

The plaintiff’s failure to pin a specific misstatement concerning Starbucks’ cold drink contents doomed his claims. The court also gives teeth to the reasonable consumer standard that applies to state law consumer protection statutes. Since the plaintiff was unable to show a reasonable consumer would have been deceived by Starbucks’ published cold drink measurements, the plaintiff’s unfair competition and consumer fraud actions failed.

Oh, and to bring things full-circle, I suppose I should report that neither Renegade norBlue Collar Man nor Too Much Time on My Hands is my favorite Styx tune. That honor goes to “Castle Walls” – the second or third song on Side 2 of 1977’s Grand Illusion album. Give it a listen. It’ll definitely cure what ails ya.

Tacking Unsigned Change Orders On To Contractors’ Lien Not Enough For Constructive Fraud – IL Court

Constructive mechanics lien fraud and slander of title are two central topics the appeals court grapples with in Roy Zenere Trucking & Excavating, Inc. v. Build Tech, Inc., 2016 IL App (3d) 140946.  There, a commercial properly developer appealed bench trial judgments for two subcontractor plaintiffs – a paving contractor and an excavating firm – on the basis that the plaintiffs’ mechanics liens were inflated and fraudulent.

The developer argued that since the subcontractors tried to augment the lien by adding unsigned change order work to it – and the contracts required all change orders to be in writing – this equaled that voided the liens.  The trial court disagreed and entered judgment for the plaintiff subcontractors.

Affirming the trial court’s judgment, the appeals court provides a useful summary of the type of proof needed to sustain constructive fraud and slander of title claims in the construction lien setting and when attorneys’ fees can be awarded to prevailing parties under Illinois’ mechanics lien statute, 770 ILCS 60/1 (the Act).

Section 7(a) of the Act provides that no lien shall be defeated to the proper amount due to an error of overcharging unless it is shown that the error or overcharge was made with an “intent to defraud.”  Constructive fraud (i.e., fraud that can’t be proven to be purposeful) can also invalidate a lien but there must be more than a simple overcharge in the lien claim.  The overage must be coupled with other evidence of fraud.

Slander of title applies where (1) a defendant makes a false and malicious publication, (2) the publication disparages the plaintiff’s title to property, and (3) damages.  “Malicious” in the slander of title context means knowingly false or that statements were made with a reckless disregard of their truth or falsity.  If a party has reasonable grounds to believe it has a legal or equitable claim to property, even if it’s later proven to be false, this won’t amount to a slander of title.

Here, the appeals court agreed with the trial court that there was no evidence to support a constructive fraud or slander of title claim.  The defendant property owner admitted that the subcontractor plaintiffs performed the contract as well as the extra change order work.

While the Court excluded the unsigned change order work from the lien amount, there was still insufficient constructive fraud or slander of title evidence to sustain the owner’s counterclaims.  Though unsuccessful in adding the change orders to the lien, the Court found the plaintiffs had a reasonable basis to recover the extra work in their lien foreclosure actions based on the parties’ contracting conduct where the owner routinely paid extras without signed change orders.

The Court then examined whether the subcontractors could add their attorneys’ fees to the judgment.  Section 17(b) of the Act allows a court to assess attorneys’ fees against a property owner who fails to pay “without just cause or right.”  This equates to an owner raising a defense not “well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.”  770 ILCS 60/17(b), (d).

The evidence at trial that the subcontractors substantially performed the paving and excavation work cut in favor of awarding fees to the plaintiffs.  There was no evidence to support the owner defendant’s failure to pay the subcontract amounts.  The Court held that this lack of a colorable basis not to pay the subcontractors was “without just cause or right” under the Act.

Afterwords:

1/ Constructive fraud requires more than a computational error in the lien amount.  There must be other “plus-factor” evidence that combines with the overcharge;

2/ Where a contractor has reasonable basis for lien claim, it will be impossible for plaintiff to meet the malicious publication requirement of a slander of title claim;

3/ This case is pro-contractor as it gives teeth to the Mechanics’ Lien Statute’s fee-shifting section.

 

 

Indy Skyline Photo Spat At Heart Of 7th Circuit’s Gloss on Affirmative Defenses, Res Judicata and Fed. Pleading Amendments – Bell v. Taylor (Part I)

Litigation over pictures of the Indianapolis skyline form the backdrop for the Seventh Circuit’s recent examination of the elements of a proper affirmative defense under Federal pleading rules and the concept of ‘finality’ for res judicata purposes in Bell v. Taylor.

There, several small businesses infringed plaintiff’s copyrights in two photographs of downtown Indianapolis: one taken at night, the other in daytime.  The defendants – an insurance company, a realtor, and a computer repair firm – all used at least one the plaintiff’s photos on company websites.  When the plaintiff couldn’t prove damages, the District Court granted summary judgment for the defendants and later dismissed a second lawsuit filed by the plaintiff against one of the defendants based on the same facts.  The plaintiff appealed.

The Seventh Circuit affirmed summary judgment of the first lawsuit and dismissal of the second action on both procedural and substantive grounds.

Turning to the claims against the computer company defendant, the court noted that the defendant denied using the plaintiff’s daytime photo.  The defendant used only the nighttime photo.  The plaintiff argued that the defendant failed to comply with Rule 8(b) by not asserting facts to support its denial that it used plaintiff’s daytime photo.

Rejecting this argument, the court noted that a proper affirmative defense limits or excuses a defendant’s liability even where the plaintiff establishes a prima facie case.  If the facts that underlie an affirmative defense are proven true, they will defeat the plaintiff’s claim even if all of the complaint allegations are true.  A defendant’s contesting a plaintiff’s factual allegation is not an affirmative defense.  It is instead a simple denial.  Since the computer defendant denied it used the daytime photo, there was no affirmative matter involved and the defendant didn’t have to comply with Rule 8’s pleading requirements.

The Seventh Circuit also affirmed the denial of the plaintiff’s attempt to amend his complaint several months after pleadings closed.  In Federal court, the right to amend pleadings is broad but not absolute.  Where allowing an amendment would result in undue delay or prejudice to the opposing party, a court has discretion to refuse a request to amend a complaint.  FRCP 15(a)(2).  Here, the Court agreed with the lower court that the plaintiff showed a lack of diligence by waiting until well after the amending pleadings deadline passed.  The plaintiff’s failure to timely seek leave to amend its complaint supported the court’s denial of its motion.

The Court also affirmed the District Court’s dismissal of the plaintiff’s second lawsuit on res judicata grounds.  When the District Court entered summary judgment for defendants on plaintiff’s copyright and state law claims (conversion, unfair competition), plaintiff’s equitable relief claims (declaratory judgment and injunctive relief) were pending.  Because of this, the summary judgment order wasn’t final for purposes of appeal.  (Plaintiff could only appeal final orders – and until the court disposed of the equitable claims, the summary judgment order wasn’t final and appealable.)

Still, finality for res judicata purposes is different from appellate finality.  An order can be final and have preclusive effect under res judicata or collateral estoppel even where other claims remain.  This was the case here as plaintiff’s sole claim against the computer company defendant was for copyright infringement.  The pending equitable claims were directed to other defendants.  So the District Court’s summary judgment order on plaintiff’s copyright infringement claims was final as to the computer defendant.  This finality triggered res judicata and barred the plaintiff’s second lawsuit on the same facts.

Afterwords:

The case’s academic value lies in its thorough summary of the pleading requirements for affirmative defenses and the factors guiding a court when determining whether to permit amendments to pleadings.  The case also stresses that finality for appeal purposes is not the same as for res judicata or collateral estoppel.  If an order disposes of a plaintiff’s claims against one but not all defendants, the order is still final as to that defendant and the plaintiff will be precluded from later filing a second lawsuit against that earlier victorious defendant.

Three-Year Limitations Period Governs Bank Customer’s Suit for Misapplied Deposits – IL First Dist.

Now we can add PSI Resources, LLC v. MB Financial Bank (2016 IL App (1st) 152204) to the case canon of decisions that harmonize conflicting statutes of limitations and show how hard it is for a corporate account holder to successfully sue its bank.

The plaintiff, an assignee of three related companies**, sued the companies’ bank for misapplying nearly $400K in client payments over a several-year period.  The bank moved to dismiss, arguing that plaintiff’s suit was time-barred by the three-year limitations period that governs actions based on negotiable instruments.***  The court dismissed the complaint and the plaintiff appealed.

Held: Affirmed

Reasons:

The key question was whether the Uniform Commercial Code’s three-year limitations period for negotiable instrument claims or the general ten-year period for breach of written contract actions applied to the plaintiff’s negligence suit against the bank.  The issue was outcome-determinative since the plaintiff didn’t file suit until more than three years passed from the most recent misapplied check.

Illinois applies a ten-year limitations period for actions based on breach of written contract.  735 ILCS 5/13-206.  By contrast, an action based on a negotiable instrument is subject to the shorter three-year period.  810 ILCS 5/4-111.

If the subject of a lawsuit is a negotiable instrument, the UCC’s three-year time period applies since UCC Article 4 actions based on conversion and Article 3 suits for improper payment both involve negotiable instruments.  810 ILCS 5/3-118(g)(conversion); 810 ILCS 5/4-111 (improper payment).

Rejecting plaintiff’s argument that this was a garden-variety breach of contract action to which the ten-year period attached, the court held that since plaintiff’s claims were essentially based on banking transactions, the three-year limitations period for negotiable instruments governed. (¶¶ 36-38)

Where two statutes of limitations arguably apply to the same cause of action, the statute that more specifically relates to the claim applies over the more general statute.  While the ten-year statute for breach of written contracts is a general, “catch-all” limitations period, section 4-111’s three-year rule more specifically relates to a bank’s duties and obligations to its customers.

And since the three-year rule was more specific as it pertained to the plaintiff’s improper deposit and payment claims, the shorter limitations period controlled and plaintiff’s suit was untimely.

The court also sided with the bank on policy grounds.  It stressed that the UCC aims to foster fluidity and efficiency in commercial transactions.  If the ten-year period applied to every breach of contract action against a bank (as plaintiff argued), the UCC’s goal of promoting commercial finality and certainty would be frustrated and possibly bog down financial deals.

The other plaintiff’s argument rejected by the court was that the discovery rule saved the plaintiff’s lawsuit.  The discovery rule protects plaintiffs who don’t know they are injured.  It suspends (tolls) the limitations period until a plaintiff knows or should know he’s been hurt.  The discovery rule standard is not subjective certainty (“I now realize I have been harmed,” e.g.).  Instead, the rule is triggered where “the injured person becomes possessed of sufficient information concerning his injury and its cause to put a reasonable person on inquiry to determine whether actionable conduct is involved.” (¶ 47)

Here, the evidence was clear that plaintiff’s assigning companies received deposit statements on a monthly basis for a several-year period.  And the monthly statements contained enough information to put the companies on notice that the bank may have misapplied deposits.  According to the court, these red flags should have motivated the plaintiff to dig deeper into the statements’ discrepancies.

Take-aways:

This case suggests that an abbreviated three-year limitations period applies to claims based on banking transactions; even if a written contract – like an account agreement – is the foundation for a plaintiff’s action against a bank.  A plaintiff with a possible breach of contract suit against his bank should take great care to sue within the three-year period when negotiable instruments are involved.

Another case lesson is that the discovery rule has limits.  If facts exist to put a reasonable person on notice that he may have suffered financial harm, he will be held to a shortened limitations period; regardless of whether he has actual knowledge of harm.

————————————————————————————————————

**  The court took judicial notice of the Illinois Secretary of State’s corporate registration database which established that the three assigned companies shared the same registered agent and business address.

*** 810 ILCS 5/3-104 (“negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.)

 

Six-year Delay in Asking For Earnest Money Back Too Long – IL Court Applies Laches Defense

Earlier this year, an Illinois appeal court examined the equitable defense of laches in an earnest money dispute between two contracting parties and former friends.  Derived from an archaic French word – laschesse – meaning “dilatory,” laches applies where a plaintiff sits on his legal rights to the point where it’s unfair to make a defendant mount a defense to the delayed claim.

The 2005 real estate contract at issue in Gardner v. Dolak, 2016 IL App (3d) 140848-U fell through and at different points in 2009 and 2011, the plaintiff buyer asked for her $55,000 deposit back.  The seller’s exclusive remedy for a buyer breach was retention of the buyer’s earnest money.

The contract also set specific deadlines for the plaintiff to complete a flood plain study and topographical survey.  When the plaintiff failed to meet the deadlines, the sale fell through.  Plaintiff sued when the Defendant refused to refund the earnest money deposit.

After a bench trial, the trial court entered judgment for the seller defendant on the basis that the plaintiff waited too long to sue and the delay in suing prejudiced the defendant.

The appeals court affirmed and sketched the contours of the laches doctrine:

  • Laches is an equitable doctrine that prevents a party from asserting a claim where he unreasonably delayed pursuing the claim and the delay misled or prejudiced his opponent;
  • Laches is based on the principle that courts will not aid a party who has knowingly sat on his rights that could have been asserted earlier;
  • To win a laches defense, the defendant must show (1) plaintiff lacked diligence in presenting his claim, and (2) the plaintiff’s delay resulted in prejudice;
  • The mere passage of time is not enough though; the defendant must show prejudice or hardship on top of the chronological delay;
  • In the context of real estate, wide property value fluctuations that harm the party claiming laches is evidence of prejudice that will support a finding of laches;
  • A party can successfully assert laches where the plaintiff remains passive and the defendant incurs risk, enters into obligations, or makes monetary expenditures.

Agreeing that the evidence supported the laches finding, the appeals court pointed out that plaintiff didn’t notify the defendant she wasn’t going through with the purchase until 6 years after the contract was signed.  During this six years, the value of the property declined markedly and the seller defendant spent considerable funds to maintain the property.

Taken together, the passage of time between contract execution (2005) and plaintiff’s lawsuit (2011) and measurable prejudice (based on the property’s drop in value) to the seller defendant was enough to support the trial court’s laches judgment.

Afterwords:

This case presents a straightforward summary of laches in the real estate context.  The party claiming laches must show more than mere passage of time between the claimed injury and the lawsuit filing date.  He must also demonstrate changed financial position as a result of the lapse of time.

Here, the property’s precipitous drop in value in the six years between contract’s execution and termination was a key factor cementing the court’s laches finding.  The question I had after reading this was what if the value of the property doubled or tripled in the interim 5 years?  Would the defendant still be able to prove laches?  Maybe so but that would be a harder sell.  The defendant would need to show the amount he spent maintaining the property over the six years exceeded the increase in property value.

 

Zero Dollars Settlement Still in ‘Good Faith’ In Corporate Embezzlement Case – IL 1st Dist.

Upon learning that its former CEO stole nearly a million dollars from it, the plaintiff marketing firm in Adgooroo, LLC v. Hechtman, 2016 IL App (1st) 142531-U, sued its accounting firm for failing to discover the multi-year embezzlement scheme.

The accounting firm in turn brought a third-party action against the plaintiff’s bank for not properly monitoring the corporate account and alerting the plaintiff to the ex-CEO’s dubious conduct.

When the bank and plaintiff agreed to settle for zero dollars, the court granted the bank’s motion for a good-faith finding and dismissed the accounting firm’s third-party complaint.  The accounting firm appealed.  It argued that the bank’s settlement with the plaintiff deprived it (the accounting firm) of its contribution rights against the bank and that the settlement was void on the basis of fraud and collusion.

The appeals court affirmed the trial court and discussed the factors a court considers in deciding whether a settlement is made in good faith and releases a settling defendant from further liability in a lawsuit.

The Joint Tortfeasor Contribution Act (740 ILCS 100/1 et seq.) tries to promote two policies: (1) encouraging settlements, and (2) ensuring that damages are assigned equitably among joint wrongdoers.  The right of contribution exists where 2 or more persons are liable arising from the same injury to person or property.  A tortfeasor who settles in good faith with the injured plaintiff is discharged from contribution liability to a non-settling defendant.  740 ILCS 100/2(c).

Here, the underlying torts alleged by the plaintiff were negligence, breach of fiduciary duty, fraud and civil conspiracy.

A settlement is deemed not in good faith if there is wrongful conduct, collusion or fraud between the settling parties.  However, the mere disparity between a settlement amount and the damages sought in a lawsuit is not an accurate measure of a settlement’s good faith.

Illinois courts note that a small settlement amount won’t necessarily equal bad faith since trial results are inherently speculative and unpredictable.  The law is also clear that settlements are designed to benefit non-settling parties.  If a non-settling party’s position is worsened by another party’s settlement, then so be it: this is viewed as “the consequence of a refusal to settle.”  (¶¶ 22-24).

A settling party bears the initial burden of making a preliminary showing of good faith.  Once this showing is made, the burden shifts to the objecting party to show by a preponderance of the evidence (i.e. more likely than not), the absence of good faith.  The court applies a fact-based totality of circumstances approach in deciding whether a settlement meets the good faith standard.

For a settlement to meet the good faith test, money doesn’t have to change hands.  This is because a promise to compromise a disputed claim or not to sue is sufficient consideration for a settlement agreement.

Here, the fact that plaintiff’s corporate resolutions required it to indemnify the bank against any third-party claims, subjected the plaintiff to liability for the third-party bank’s defense costs.  The bank’s possible exposure was a judgment against it for the accounting firm.  As a result, the marketing company and bank both benefited from the settlement and there was sufficient consideration supporting their mutual walk-away.

Take-aways:

This case sharply illustrates the harsh results that can flow from piecemeal settlement.  On its face, the settlement seems unfair to the accounting firm defendant: the plaintiff settled with the third-party defendant who then gets dismissed from the lawsuit for no money.  However, under the law, a promise for a promise not to sue is valid consideration in light of the inherent uncertainty connected with litigation.

The case also spotlights broad disclaimer language in account agreements between banks and corporate customers as well as indemnification language in corporate resolutions.  It’s clear here that the liability limiting language in the deposit agreement and resolutions doubly protected the bank, giving plaintiff extra impetus to settle.

 

Condo Buyer’s Illness Not Enough to Make Closing ‘Impossible’ – IL First District

An Illinois appeals court recently followed case precedent and narrowly construed the impossibility of performance and commercial frustration defenses in a failed real estate deal.

The parties in Ury v. DiBari, 2016 IL App (1st) 150277-U contracted for the sale and purchase of a (Chicago) Gold Coast condominium.  The contract called for a $55K earnest money payment and provided that the seller’s sole remedy in the event of buyer breach was retention of the buyer’s earnest money.

The seller sued when the buyer failed to close.  The buyer filed defenses saying it was impossible and commercially impractical for him to consummate the purchase due to a sudden serious illness he suffered right before the scheduled closing.  The Court rejected the defenses and entered summary judgment for the seller.  In doing so, the Court provides guidance on the nature and scope of the impossibility of performance and commercial frustration doctrines.

In the context of contract enforcement, parties generally must adhere to the negotiated contract terms.  Subsequent events – especially ones that are foreseeable – not provided for do not invalidate a contract.  The legal impossibility doctrine operates as an exception to the rule that holds parties to their contract obligations.

Legal impossibility applies where the continued existence of a particular person or thing is so necessary to the performance of the contract, it is viewed as an implied condition of the contract.  Death (of the person) or destruction (of the thing) excuses the other party’s performance.

The impossibility defense is applied sparingly and requires that a party’s performance be objectively impossible; not a subjective inconvenience or hardship.  Objective impossibility equates to “this can’t be done” while subjective impossibility is personal (“I cannot do this”) to the promisor.  A successful impossibility defense also requires the party to show it ” tried all practical alternatives available to permit performance.” (¶¶ 21-24, 29)

The defendant’s illness failed the law’s stringent test for objective impossibility.  His sickness was unique to him and therefore made closing only subjectively impossible.  The court pointed out that the condominium property was not destroyed and was still capable of being sold.

Another factor the court considered in rejecting the impossibility defense was that the defendant never tried to extend the closing date or sought accommodation for his illness.

The Court also discarded the defendant’s commercial frustration defense.  A party asserting commercial frustration must show that its performance under a contract is rendered meaningless due to an unforeseen change in circumstances.  Specifically, the commercially frustrated party has to demonstrate (1) the frustrating event was not reasonably foreseeable, and (2) the value of the party’s performance is totally destroyed by the frustrating cause.

Like with the failed impossibility defense, the claimed frustrating event – the buyer’s sickness – was foreseeable and did not destroy the subject matter of the contract.  Since the defendant’s weakened condition did not make the property worthless, there was no unforeseen frustrating event to give color to the buyer’s defense.

Afterwords:

1/ Impossibility of performance and commercial frustration are valid defenses but only in limited circumstances;

2/ Objective impossibility (“this can’t be done”) can relieve a party from contractual performance while subjective impossibility (“I can’t do this”) will not;

3/ Commercial frustration generally requires the contract’s subject matter be destroyed or rendered financially valueless to excuse a party from performance.

 

Judgment Creditor Can Recover Attorneys’ Fees Spent Pursuing Successful Veil Piercing Suit Versus Corporate Officers

Q:           Can a judgment creditor recover attorneys’ fees incurred in both its post-judgment discovery efforts after a default judgment against a defunct corporation and a subsequent piercing the corporate veil action to enforce the prior judgment where the contract with the defunct entity contains an attorneys’ fees provision?

A:            Yes.

That’s the salient and nuanced holding from Steiner Electric Company v. Maniscalco, 2016 IL App (1st) 132023, a case that’s a boon to creditor’s rights attorneys and corporate litigators.

There, the First District held in a matter of first impression that a plaintiff could recover fees in a later piercing the corporate veil suit where the underlying contract litigated to judgment in an earlier case against a corporation has an attorneys’ fees provision.

The plaintiff supplied electrical and generator components on credit over several years to a company owned by the defendant.  The governing document between the parties was a credit agreement that had a broad attorneys’ fees provision.

When the company defaulted by failing to pay for ordered and delivered equipment, the plaintiff sued and won a default judgment against the company for about $230K. After its post-judgment efforts came up empty, the plaintiff filed a new action to pierce the corporate veil hold the company president responsible for the earlier money judgment.

The trial court pierced the corporate veil and found the company president responsible for the money judgment against his company but declined to award plaintiff its attorneys’ fees generated in litigating the piercing action.

The First District affirmed the piercing judgment and reversed the trial court’s refusal to assess attorneys’ fees against the company President.

The Court first affirmed the piercing judgment on the basis that the company was inadequately capitalized (the company had a consistent negative balance), commingled funds with a related entity and the individual defendant and failed to follow basic corporate formalities (it failed to appoint any officers or document significant financial transactions).

In finding the plaintiff could recover its attorneys’ fees – both in the underlying suit and in the second piercing suit to enforce the prior judgment – the court stressed that piercing is an equitable remedy and not a standalone cause of action.  The court further refined its description of the piercing remedy by casting it as a means of enforcing liability on an underlying claim – such as the prior breach of contract action against the defendant’s judgment-proof company.

While a prevailing party in Illinois must normally pay its own attorneys’ fees, the fees can be shifted to the losing party where a statute or contract says so.  And there must be clear language in a contract for a court to award attorneys’ fees to a prevailing litigant.

Looking to Illinois (Fontana v. TLD Builders, Inc.), Seventh Circuit (Centerpoint v. Halim) (see write-up here and Colorado (Swinerton Builders v. Nassi) case precedent for guidance, the Court found that since the underlying contract – the Credit Agreement – contained expansive fee-shifting language, the plaintiff could recoup from the defendant the fees expended in both the first breach of contract suit against the company and the second, piercing case against the company president.  The Court echoed the Colorado appeals court’s (in Swinerton) depiction of piercing the corporate veil as a “procedural mechanism” to enforce an underlying judgment.

The combination of broad contractual fees language in the credit application and case law from different jurisdictions that fastened fee awards to company officers on similar facts led the First District to reverse the trial court and tax fees against the company president. (¶¶ 74-90)

Afterwords:

An important case and one that fee-seeking commercial litigators should look to for support of their recovery efforts.  A key lesson of Steiner is that broad, unequivocal attorneys’ fees language in a contract not only applies to an initial breach of contract suit against a dissolved company but also to a second, piercing lawsuit to enforce the earlier judgment against a company officer or controlling shareholder.

For the dominant shareholders of dissolved corporations, the case spells possible trouble since it upends the firmly entrenched principle that fee-shifting language in a contract only binds parties to the contract (not third parties).

Commercial Tenant’s Promise to Refund Broker Commissions Barred by Statute of Frauds – IL First Dist.

The plaintiff property owner in Peppercorn 1248 LLC v. Artemis DCLP, LLP, 2016 IL App (1st) 143791-U, sued a corporate tenant and its real estate brokers for return of commission payments where the tenant never took possession under a ten-year lease for a Chicago daycare facility.  Shortly after the lease was signed, the tenant invoked a licensing contingency and terminated the lease.

The lease conditioned tenant’s occupancy on the tenant securing the required City zoning and parking permits.  If the tenant was unable to obtain the licenses, it could declare the lease cancelled.  When the tenant refused to take possession, the plaintiff sued to recoup the commission payment.

Affirming summary judgment for the broker defendants, the Court addressed some recurring contract formation and enforcement issues prevalent in commercial litigation along with the “interference” prong of the tortious interference with contract claim.

In Illinois, where a contracting party is given discretion to perform a certain act, he must do so in good faith: the discretion must be exercised “reasonably,” with a “proper motive” and not “arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.” (73-74)

Here, there was no evidence the tenant terminated the lease in bad faith.  It could not get the necessary permits and so was incapable of operating a daycare business on the site. 

Next, the court found the plaintiff’s claim for breach of oral contract (based on the brokers’ verbal promise to refund the commission payments) unenforceable under the Statute of Frauds’ (“SOF”) suretyship rule. A suretyship exists where one party, the surety, agrees to assume an obligation of another person, the principal, to a creditor of the principal.

The SOF bars a plaintiff’s claim that seeks to hold a third party responsible for another’s debt where the third party did not promise to pay the debt in writing.

An exception to this rule is the “main purpose” defense. This applies where the “main purpose” of an oral promise is to materially benefit or advance the promisor’s business interests.  In such a case, an oral promise to pay another’s debt can be enforced.

The court declined to apply the main purpose exception here.  It noted that the brokers’ commission payments totaled less than $70K on a 10-year lease worth $1.4M. The large disparity between the commission and total lease payments through the ten-year term cut against the plaintiff’s main- purpose argument.

The plaintiff sued the corporate tenant for failing to return the commission payments to the brokers. Since the tenant and the broker defendants were separate parties, any promise by the tenant to answer for the brokers’ debt had to be in writing (by the tenant) to be enforceable.

The court also upheld summary judgment for the defendant on the plaintiff’s tortious interference count. (See here for tortious interference elements.)  A tortious interference with contract plaintiff must show, among other things, the defendant actively induced a breach of contract between plaintiff and another party.  However, the mere failure to act – without more – usually will not rise to the level of purposeful activity aimed at causing a breach.

The Court found one of the broker defendant’s alleged failure to help secure business permits for the tenant didn’t rise to the level of  intentional conduct that induced tenant’s breach of lease.  As a result, the plaintiff failed to offer evidence in support of the interference prong of its tortious interference claim sufficient to survive summary judgment.

Afterwords:

1/ A promise to pay another’s debt – a suretyship relationship – must be in writing to be enforceable under the SOF;

2/ A contractual relationship won’t give rise to a duty to disclose in a fraudulent concealment case unless there is demonstrated disparity in bargaining power between the parties;

3/ Tortious interference with contract requires active conduct that causes a breach of contract; a mere failure to act won’t normally qualify as sufficient contractual interference to be actionable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How to Buy Environmental Consulting Like a Pro: The Phase 1 ESA (A Guest Post)

Today’s Q & A guest post is courtesy of Winfield, Illinois’ A3 Environmental, LLC , a full-service environmental consulting and testing firm representing lenders, developers, private and governmental buyers and sellers of commercial and industrial properties across the country.  

A3’s contact information: (888) 405-1742 (phone); [email protected] (e-mail); contact: Alisa Allen and Tim Allen https://a3e.com (company web page)

How to buy Environmental Consulting like a Pro: The Phase 1 ESA (Environmental Site Assessment)

Q: Who Pays For The Phase 1 ESA?

A: Like most real estate deals, it is negotiable. Typically, the party borrowing money is required by the bank to purchase the Phase 1 ESA as part of their due diligence.  A seller can commission their own Phase 1 ESA and provide it as part of their marketing materials to help speed a sale, but it is up to the buyer to make sure they have done their due diligence in order to qualify for liability protection under the innocent landowner defense.

Q:How Long Is A Phase 1 ESA Good For?

A: The Phase 1 ESA has a shelf life of six months (180 days). After six months, the Phase 1 ESA should be updated or a new one commissioned. The original consultant should complete the updated report and it should be less expensive than purchasing a new one. A buyer can rely upon a seller’s Phase 1 ESA, but they will not qualify for liability protection unless issued a reliance letter from the consultant who performed it. Costs for a reliance letter vary and are dependent upon the consultant.

Q: How Much Should A Phase 1 ESA Cost?

A: Different types of properties have different levels of complexity, which will be reflected in the price. An industrial property in an urban setting will be more difficult than a hotel built on a former cornfield. A simple Phase 1 ESA should start at less than $2,000.

Q: How Long Will A Phase 1 ESA Take To Complete?

A: The goal at A3 Environmental is to complete the Phase I ESA in two weeks. Other consultants typically take three to four weeks to complete a Phase 1 ESA. Properly done, a Phase 1 ESA will include an environmental database search, a historical records review, interviews, FOIA requests to appropriate entities, a site inspection, and a report that needs to be written by an environmental professional. Scheduling the site visit to coordinate with the on-site contact’s schedule and getting responses from FOIA requests are two things that can significantly prolong the process.

Q: Does The Bank Pick The Environmental Consultant?

A: Banks often pick the environmental consultant but pass the costs on to you.  They do this for two reasons: convenience and familiarity.  The problem with this arrangement is that the consultant isn’t accountable to the buyer; their client is the bank. Borrowers who shop for prices can often save themselves hundreds, if not thousands of dollars.  Most banks have their own ‘approved’ consultants and are commissioned before the buyer even knows it.   It’s important that your consultant be accountable to you, the buyer, because the risk you are taking and their associated costs are primarily yours. A3 Environmental is owned by Alisa Allen; a Licensed Professional Geologist, certified by the State of Illinois Office of Professional Regulation. A sample of our work can be provided upon request to any bank.

Q: What’s The Most Important Thing To Be On The Lookout For? Where Are You The Most Vulnerable?

To buy environmental consulting like a pro, there are two places to be on the lookout to guard against vulnerability. The first is to protect yourself against shoddy science. Make sure your consultant is familiar with the local area, is insured for errors and omissions, and has a track record of providing quality work product. The second, and possibly most important thing to guard against is the recommendation of further investigation, also known as a Phase 2 ESA. When getting ready to spend large sums of money the lender and buyer are both in vulnerable positions. Some consultants take advantage of this vulnerability and recommend a Phase 2 ESA when it may not be completely necessary. It’s difficult for banks and buyers to say no.

If a Phase 2 ESA is recommended, you can protect yourself by going back to the seller and renegotiating for them to pay some, or all, of the bill. Another way to protect yourself is to bid out any Phase 2 ESA work to your current consultant and other consultants in order to keep your consultant honest.  You can also get a second opinion from a different consultant, for a few hours of consulting time. The time and money you save can be well worth it. A3 Environmental would be happy to review a Phase 1 ESA report from consultants recommending a Phase 2 ESA. We offer a half hour of consulting time for free per project.

Q: What’s The Best Way To Save Money When Buying Environmental Consulting?

A: There are three ways to save money when buying environmental consulting services: (1) negotiate for the seller to pay for any possible investigation before you have a contract on the property; (2) don’t accept the bank’s environmental consultant; shop for pricing; (3) if further investigation is necessary, obtain several consulting proposals.

Q: What’s Your Best Advice?

A: Build a good relationship with one environmental consultant after you have done your initial research and a project or two. True, it’s important to hire a competitively priced consultant; however, having a solid relationship with a consultant you can call and have meaningful conversations, often at no charge, can be very valuable. If a consultant knows you are a reliable repeat buyer of environmental services they will work extra hard to be a trusted resource to help you save money, frustration and time.

Parting Thought:

This document is a complete listing of our best advice for purchasing environmental consulting. It’s a sample of the level of honesty, integrity and value we here at A3 Environmental live every day. We hope that you recognize this and consider us when choosing a trusted resource to achieve your goals.

Joint Mortgage Debt Means No Tenancy By Entirety Protection for Homeowners

The Illinois First District recently affirmed a mortgage foreclosure summary judgment for a plaintiff mortgage lender in a case involving the protection given to tenancy by the entirety (TBE) property.

In Marquette Bank v. Heartland Bank and Trust, 2015 IL App (1st) 142627, the main issue was whether a marital home was protected from foreclosure where it was owned by a land trust, the beneficiaries of which were a husband and wife; each owning beneficial interests TBE.

The defendants argued that since their home was owned by a land trust and they were the TBE beneficial owners of that land trust, the plaintiff could not foreclose its mortgage.

Affirming summary judgment, the appeals court examined the interplay between land trust law and how TBE property impacts judgment creditors’ rights.

The Illinois Joint Tenancy Act (765 ILCS 1005/1c) allows land trust beneficiaries to own their interests TBE and Code Section 12-112 (735 ILCS 5/12-112) provides that a TBE land trust beneficial interest “shall not be liable to be sold upon judgment entered….against only one of the tenants, except if the property was transferred into [TBE] with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the transferor’s ability to pay those debts as they become due.”

TBE ownership protects marital residence property from a foreclosing creditor of only one spouse.  In TBE ownership, a husband and wife are considered a single unit – they each own 100% of the home – and the judgment creditors of one spouse normally can’t enforce a money judgment against the other spouse by forcing the home’s sale.

An exception to this rule is where property is conveyed into TBE solely to evade one spouse’s debt.  Another limitation on TBE protection is where both spouses are jointly liable on a debt.  In the joint debt setting, a judgment against one spouse will attach to the marital home and can be foreclosed on by the judgment creditor.

Code Section 12-112 provides that where property is held in a land trust and the trust’s beneficial owners are husband and wife, a creditor of only one of them can’t sell the other spouse’s beneficial land trust interest. 735 ILCS 5/12-112.

The Court rejected the defendants argument that as TBE land trust beneficiaries of the marital home, the spouse defendants were immune from foreclosure.  It noted that both spouses signed letters of direction authorizing the land trustee (owner) to mortgage the property, the mortgage documents allowed the plaintiff to foreclose in the event of default and empowered the lender to sell all or any part of the property. (¶¶ 16-18)

Summary Quick-Hits:

  • TBE property ownership protects an innocent spouse by saving the marital home from a judgment creditor’s foreclosure suit where only one spouse is liable on a debt;
  • A land trust beneficial interest is considered personal property and can be jointly owned in tenancy by the entirety;
  • Where spouses are jointly (both) liable on an underlying debt, TBE property can be sold to satisfy the joint debt.

 

Ill. Wage Payment and Collection Act Doesn’t Apply to NY and Cal. Corps. With Only Random Ill. Contacts

As worker mobility increases and employees working in one state and living in another almost an afterthought, questions of court jurisdiction over intrastate workplace relationships come to the fore.  Another issue triggered by a geographically nimble workforce is whether a non-resident can invoke the protections of another state’s laws.

Illinois provides a powerful remedial scheme for employees who are stiffed by their employers in the form of the Wage Payment and Collection Act, 820 ILCS 115/1 (“Wage Act”).  See (here).  The Wage Act allows an employee to sue an employer for unpaid wages, bonuses or commissions where an employer breaches a written or oral employment contract.

The focal point of Cohan v. Medline Industries, Inc., 2016 WL 1086514 (N.D.Ill. 2016) is whether non-residents of Illinois can invoke the Wage Act against an Illinois-based employer for unpaid sales commissions.  The plaintiffs there, New York and California residents, sued their Illinois employer, for breach of various employment contract commission schedules involving the sale of medical devices.

The Northern District of Illinois held that the salespeople plaintiffs could not sue under Illinois’ Wage Act where their in-person contacts with Illinois were scarce.  The plaintiffs only entered Illinois for a few days a year as part of their employer’s mandatory sales training protocol.  All of the plaintiffs’ sales work was performed in their respective home states.

Highlights from the Court’s opinion include:

  •  The Wage Act doesn’t have “extraterritorial reach;” It’s purpose is to protect Illinois employees from being shorted compensation by their employers;
  • The Wage Act does protect non-Illinois residents who perform work in Illinois for an Illinois employer;
  • A plaintiff must perform “sufficient” work in Illinois to merit Wage Act protection;
  • There is no mechanical test to decide what is considered “sufficient” Illinois work to trigger the Wage Act protections;
  • The Wage Act only applies where there is an agreement – however informal – between an employer and employee;
  • The agreement required to trigger the Wage Act’s application doesn’t have to be formal or in writing. So long as there is a meeting of the minds, the Court will enforce the agreement;
  • The Wage Act does not cover employee claims to compensation outside of a written or oral agreement

Based on the plaintiffs’ episodic (at best) contacts with Illinois, the Court found that the Wage Act didn’t cover the plaintiffs’ unpaid commission claims.
Substantively, the Court found the Wage Act inapplicable as there was nothing in the various written employment agreements that supported the plaintiff’s damage calculations.  The plaintiffs’ relationship with the Illinois employer was set forth in multiple contracts that contained elaborate commission schedules.  Since the plaintiff’s claims sought damages beyond the scope of the written schedules, the Wage Act didn’t govern.
Take-aways:

1/ The Illinois Wage Act will apply to a non-resident of Illinois if he/she performs a sufficient quantum of work in Illinois;

2/ Scattered contacts with Illinois that are unrelated to a plaintiff’s job are not sufficient enough to qualify for a viable Wage Act lawsuit;

3/ While an agreement supporting a Wage Act claim doesn’t have to be in writing, there must be some agreement – no matter how unstructured or loose – for a plaintiff to have standing to sue for a Wage Act violation.

Corporate Five-Year Winding Up or “Survival” Period Has Harsh Results for Asbestos Injury Plaintiffs – Illinois Court

An Illinois appeals court recently considered the interplay between the corporate survival statute, 805 ILCS 5/12.80 (the “Survival Act”), which governs lawsuits against dissolved corporations) and when someone can bring a direct action against another person’s liability insurer.

The personal injury plaintiffs in Adams v. Employers Insurance Company of Wasau, 2016 IL App (3d) 150418 sued their former employer’s successor for asbestos-related injuries. Plaintiffs also sued the former company’s liability insurers for a declaratory ruling that their claims were covered by the policies.

The former employer dissolved in 2003 and plaintiffs filed suit in 2011. The plaintiffs alleged the dissolved company’s insurance policies transferred to the shareholders and the corporate successor. The insurers moved to dismiss on the basis that the plaintiff’s suit was untimely under the Survival Act’s five-year winding up (“survival”) period to sue dissolved companies and because Illinois law prohibits direct actions against insurers by non-policy holders.

Affirming dismissal of the suit against the insurers, the court considered the scope of the Survival Act and whether its five-year repose period (the time limit to sue a defunct company) can ever be relaxed.

The Survival Act allows a corporation to sue or be sued up to five years from the date of dissolution. The suit must be based on a pre-dissolution debt and the five-year limit applies equally to individual corporate shareholders.  The statute tries to strike a balance between allowing lawsuits to be brought by or against a dissolved corporation and still setting a definite end date for a corporation’s liability. The five-year time limit for a corporation to sue or be sued represents the legislature’s determination that a corporation’s liability must come to and end at some point.

Exceptions to the Survival Act’s five-year repose period apply where a shareholder is a direct beneficiary of a contract and where the amount claimed is a “fixed, ascertainable sum.”

The Court held that since the plaintiffs didn’t file suit until long after the five-year repose period expired, and no shareholder direct actions were involved, the plaintiffs’ claims against the dissolved company (the plaintiffs’ former employer) were too late.

Illinois law also bans direct actions against insurance companies. The policy reason for this is to prevent a jury in a personal injury suit from learning that a defendant is insured and eliminate a jury’s temptation to award a larger verdict under the “deep pockets” theory (to paraphrase: “since defendant is protected by insurance, we may as well hit him with a hefty verdict.”)

The only time a direct action is allowed is where the question of coverage is entirely separate from the issue of the insured’s liability and damages. Where a plaintiff’s claim combines liability, damages and coverage, the direct action bar applies (the plaintiff cannot sue someone else’s insurer).

Here, the plaintiffs’ coverage claim was intertwined with the former employer’s (the dissolved entity) liability to the plaintiffs.  As a result, the plaintiffs action was an impermissible direct action against the dissolved company’s insurers.

Take-aways:

The Case starkly illustrates how unforgiving a statutory repose period is.  While the plaintiff’s injuries here were substantial, the Court made it clear it had to follow the law and that where the legislature has spoken – as it had by enacting the Survival Act – the Court must defer to it. Otherwise, the court encroaches on the law-making function of the legislature.

Another case lesson is that plaintiffs who have claims against dissolved companies should do all they can to ensure their claims are filed within the five-year post-dissolution period.  Otherwise, they risk having their claims time-barred.

 

Debtor’s Refusal to Return Electronic Data = Embezzlement – No Bankruptcy Discharge – IL ND

FNA Group, Inc. v. Arvanitis, 2015 WL 5202990 (Bankr. N.D. Ill. 2015) examines the tension between the bankruptcy code’s aim of giving a financial fresh start to a debtor and the Law’s attempt to protect creditors from underhanded debtor conduct to avoid his debts.

After a 15-year employment relationship went sour, the plaintiff power washing company sued a former management-level employee when he failed to turn over confidential company property (the “Data”) he had access to during his employment.

After refusing a state court judge’s order to turn over the Data and an ensuing civil contempt finding, the defendant filed bankruptcy.

The plaintiff filed an adversary complaint in the bankruptcy case alleging the defendant’s (now the debtor) embezzlement and wilfull injury to company Data.

The plaintiff asked the bankruptcy court to find that the debtor’s obligations to the plaintiff were not dischargeable (i.e. could not be wiped out).

Siding with the plaintiff, the Court provides a useful discussion of the embezzlement and the wilfull and malicious injury bankruptcy discharge exceptions.

The bankruptcy code’s discharge mechanism aims to give a debtor a fresh start by relieving him of pre-petition debts. Exceptions to the general discharge rule are construed strictly against the creditor and liberally in favor of the debtor.

Embezzlement under the bankruptcy code means the “fraudulent appropriation of property” by a person to whom the property was entrusted or to whom the property was lawfully transferred at some point.

A creditor who seeks to invoke the embezzlement discharge exception must show: (1) the debtor appropriated property or funds for his/her benefit, and (2) the debtor did so with fraudulent intent.

Fraudulent intent in the embezzlement context means “without authorization.” 11 U.S.C. s. 523(a)(4).

The Court found the creditor established all embezzlement elements. First, the debtor was clearly entrusted with the Data during his lengthy employment tenure. The debtor also appropriated the Data for his own use – as was evident by his emails where he threatened to destroy the Data or divulge its contents to plaintiff’s competitors.

Finally, the debtor lacked authorization to hold the Data after his resignation based on a non-disclosure agreement he signed where he acknowledged all things provided to him remained company property and had to be returned when he left the company.

By holding the Data hostage to extract a better severance package, the debtor exhibited a fraudulent intent.

The court also refused to allow a debtor discharge based on the bankruptcy code’s exception for willful and malicious injury. 11 U.S.C. s. 523(a)(6).

An “injury” under this section equates to the violation of another’s personal or property rights. “Wilfull” means an intent to injure the person’s property while “malicious” signals a conscious disregard for another’s rights without cause.

Here, the debtor injured the plaintiff by refusing to release the Data despite a (state) court order requiring him to do so. Plaintiff spent nearly $200,000 reconstructing the stolen property and retaining forensic experts and lawyers to negotiate the Data’s return.

Lastly, the debtor’s threatening e-mails to plaintiff in efforts to coerce the plaintiff to up its severance payment was malicious under Section 523 since the e-mails exhibited a disregard for the importance of the Data and its integrity.

Take-aways:

The bankruptcy law goal of giving a debtor fiscal breathing room has limits. If the debtor engages in intentional conduct aimed at evading creditors or furthers a scheme of lying to the bankruptcy court, his pre-petition debts won’t be discharged.

This case is post-worthy as it gives content to the embezzlement and wilfull and malicious property damage discharge exceptions.

Third Party Enforcement of A Non-Compete and Trade Secret Pre-emption – IL Law

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In Cronimet Holdings v. Keywell Metals, LLC, 2014 WL 580414 (N.D.Ill. 2014), the Northern District of Illinois considers whether a non-compete contract is enforceable by a stranger to that contract as well as trade secret pre-emption of other claims.

Facts and Procedural History

Plaintiff, who previously signed a non-disclosure agreement with a defunct metal company (the “Target Company”) it was considering buying, filed a declaratory action against a competitor (“Competitor”) requesting a ruling that the non-disclosure agreement and separate non-competes signed by the Target Company’s employees were not enforceable by the competitor who bought  the Target Company’s assets. The NDA and non-competes spanned 24 months.

The plaintiff moved to dismiss eight of the ten counterclaims filed by the Competitor.  It argued the Competitor lacked standing to enforce the non-competes and that its trade secrets counterclaim (based on the Illinois Trade Secrets Act, 765 ILCS 1065/1 (“ITSA”)) pre-empted several of the tort counterclaims.

In gutting most (8 out of 10) of the counterclaims, the court applied the operative rules governing when non-competes can be enforced by third parties:

– Illinois would likely permit the assignment of a non-compete to a third party;

– Enforcing a non-compete presupposes a legitimate business interest to be protected;

– A legitimate business interest is a fact-based inquiry that focuses on whether there is (i) a “near-permanence” in a customer relationship, (ii) the company’s interest in a stable work force , (iii) whether a former employee acquired confidential information and (iv) whether a given non-compete has valid time and space restrictions;

– A successor corporation can enforce confidentiality agreements signed by a predecessor (acquired) corporation where the acquired corporation merges into the acquiring one;

– A successor in interest is one who follows an original owner in control of property and who retains the same rights as the original owner;

– The ITSA pre-empts (displaces) conflicting or redundant tort claims that are based on a defendant’s misappropriation of trade secrets;

– Claims for unjust enrichment, quasi-contract relief or unfair competition are displaced by the ITSA where the claims essentially allege a trade secrets violation;

– The ITSA supplants claims that involve information that doesn’t rise to the level of a trade secret (e.g. not known to others and kept under ‘lock-and-key’);

(**4-5).

The court found that since a bankruptcy court (in the Target Company’s bankruptcy) previously ruled that the Competitor didn’t purchase the non-competes, and wasn’t the Target Company’s successor, the Competitor lacked standing to enforce the non-competes.

The Court also held that once the Target Company stopped doing business, its non-competes automatically lapsed since it no longer had any secret data or customers to protect.

The Court also agreed that the Company’s ITSA claim pre-empted its claims that asserted plaintiff was wrongfully using the Target Company’s secret data.  The court even applied ITSA pre-emption to non-trade secret information.  It held that so long as the information sought to be protected in a claim was allegedly secret, any non-ITSA claims based on that information were pre-empted.

Afterwords:

(1) A non-compete can likely be assigned to a third party;

(2) Where the party assigning a non-compete goes out of business, the assignor no longer has a legitimate business interest to protect; making it hard for the assignee to enforce the non-compete;

(3) ITSA, the Illinois trade secrets statute, will displace (pre-empt) causes of action or equitable remedies (unjust enrichment, unfair competition, etc.) that are based on a defendant’s improper use of confidential information – even where that information  doesn’t rise to the level of a trade secret.

No Punitive Damages Allowed In Statutory Replevin Action – IL 2d District

In Sensational Four, Inc. v. Tri-Par Die and Mold Corporation, 2016 IL App (2d) 150468, the food company plaintiff filed a replevin action against a manufacturer to recover  plaintiff’s injection molding equipment used to make jars and lids.

When the defendant failed to return plaintiff’s equipment despite a court replevin order to do so, plaintiff filed a rule to show cause motion and amended its complaint to assert various tort and contract claims.

The trial court claim found for the plaintiff after a bench trial and assessed punitive damages of $100,000 against the defendant for its “egregious” and malicious refusal to return the plaintiff’s equipment.  The defendant appealed on the basis that its due process rights were violated by the punitive damage award.

Held: Reversed.

Rules/Reasons:

Punitive damages aren’t favored in Illinois. Their purpose is to punish a defendant and deter others from acting with willful disregard for others’ rights.

Replevin is a statutory proceeding that requires a plaintiff to follow the replevin statute’s (see 735 ILCS 5/19-101, et seq.) provisions to the letter.

When construing a statute, a court looks first to the statutory language to divine the legislature’s intent.  And courts generally should not graft language on to a silent statute since this encroaches on the legislature’s drafting role.

Some statutes explicitly provide for punitive damages while others implicitly allow them. See Public Utilities Act (punitive damages expressly allowed); Nursing Home Care Act (implied punitives allowed where statute references “any other type of relief”). (¶ 25)

The Illinois replevin statute says nothing about punitive damages. It allows a plaintiff to recover damages sustained by the wrongful detention of the property in question along with costs and expenses related to the replevin. 735 ILCS 5/19-101, 120, 125. (¶¶ 26-28).  Nowhere does the statute mention punitive damages.

The Court reversed the punitive damage award since the replevin statute doesn’t explicitly allow punitive damages.  The Court noted that the legislature could have easily provided for a punitive damages remedy in the statute’s text if that was its intent.

Take-aways:

This case serves as a straight-forward example of a court refusing to inject meaning into a statute whose text is clear.  Where a statute doesn’t specifically allow for punitive damages, a plaintiff will have difficulty convincing a court to award them.  By contrast, if the statutory language is open-ended, like the Nursing Home Care Act’s “any other type of relief” language, a plaintiff may have a claim for punitive damages if it can prove a defendant’s intentional and extreme conduct.

Seventh Circuit Jettisons Software Firm’s Computer Fraud Case – No Damages Evidence

Earlier this year, the Seventh Circuit affirmed summary judgment for a real estate analytics company sued by a software firm who claimed the company was pilfering on-line land records.

The plaintiff in Fidlar Technologies v. LPS Real Estate Data Solutions, 810 F.3d 1075 (7th Cir. 2016) developed a software program called “Laredo” that computerized real estate records and made them available to viewers for a fee.  The plaintiff sued when it found out that the defendant was using a web harvester to bypass plaintiff’s software controls and capture the electronic records.  The defendant’s harvester allowed it to disguise the amount of time it was spending on-line and so avoid paying print fees associated with the electronic data. 

The Computer Fraud And Abuse Act (CFAA) Claim

The Court found the was a lack of evidence to support plaintiff’s Computer Fraud and Abuse Act (CFAA) claim as plaintiff could not show the defendant’s “intent to defraud” or “damage” under the CFAA. See CFAA, 18 U.S.C. s. 1030.

CFAA: Intent to Defraud (18 U.S.C. s. 1030(a)(4)

The CFAA defines an intent to defraud as acting “willfully and with specific intent to deceive or cheat, usually for the purpose of getting financial gain for one’s self or causing financial loss to another.” An intent to defraud can be shown by circumstantial evidence since direct intent evidence is typically unavailable.

The Court credited the defendant’s sworn testimony that printing real estate records was a minor part of its business and that it did pay maximum monthly access fees for computerized real estate data.  

The defendant also produced evidence that it used its harvester not only in fee-charging counties, but also in those that didn’t charge at all.  This bolstered its argument that the harvester’s fee-avoidance was an unintended consequence of the defendant’s program.

Finally, the Court noted that defendant’s agreements with the various county offices (which made the real estate data available) didn’t expressly prohibit the use of a web harvester. These factors all weighed against finding intentional conduct under the CFAA by the defendant analytics company.

CFAA: Transmission and Damage Claim (18 U.S.C. s. 1030(a)(5)(a)

The Seventh Circuit also rejected the plaintiff’s CFAA transmission claim; echoing the District Court’s cramped construction of the CFAA.  The Court described the CFAA’s aim as punishing those who access computers in order to delete, destroy, or disable information.

“Damage” is defined in the CFAA as “any impairment to the integrity or availability of data, a program, a system or information….” 1030(e)(8). The Court interpreted this as destructive behavior aimed at injuring physical computer equipment or its stored data. Examples of this type of damaging conduct includes using a virus or deleting data.  Flooding an email account with data could also qualify as CFAA damage according to at least one case cited by the court. 

Here, the defendant’s conduct didn’t impair the integrity of any computer hardware or compromise any real estate data. The defendant’s attempt to bypass on-line printing access and print fees is not the type of damage envisioned by the CFAA.  According to the Court, mere copying of computer data doesn’t fit the CFAA’s damage definition.  18 U.S.C. § 1030(e)(8).

Afterwords:

Fidlar represents a court narrowly applying the CFAA so that it doesn’t cover the type of economic loss (e.g. subscription fees, etc.) claimed here by the plaintiff.  The case also illustrates that a successful CFAA claimant must show its computer equipment was physically harmed or its data destroyed.  Otherwise, a plaintiff will have to choose a non-CFAA remedy such as a breach of contract, trespass to chattels or trade secrets violation.

 

Faulty Service on Defunct LLC Spells Trouble for Judgment Creditor – IL 1st Dist.

In a case whose procedural progression spans more than a decade, the First District in John Isfan Construction v. Longwood Towers, LLC, 2016 IL App (1st) 143211 examines the litigation aftershocks flowing from a failure to properly serve a limited liability company (LLC).

The case also illustrates when a money judgment can be vacated under the “substantial justice” standard governing non-final judgments.

The tortured case chronology went like this:

2003 – plaintiff files a mechanics lien suit against LLC for unpaid construction work on an 80-unit condominium development;

2005 – LLC dissolves involuntarily;

2005 – lien suit voluntarily dismissed;

2006 – plaintiff breach of contract action filed against LLC;

2009 – default judgment entered against LLC for about $800K;

2011 – plaintiff issues citations to discover assets to LLC’s former members and files complaint against the members to hold them liable for the 2009 default judgment (on the theory that the LLC made unlawful distributions to the members);

2014 – LLC members move to vacate the 2009 judgment. Motion is denied by the trial court and LLC members appeal.

Holding: The appeals court reversed the trial court and found that the 2009 default judgment was void.

The reason: Plaintiff’s failure to properly serve the defunct LLC under Illinois law. As a result, a hefty money judgment was vacated.

Q:           Why?

A:            A defendant must be served with process for a court to exercise personal jurisdiction over him.  A judgment entered against a party who is not properly served is void.  

Section 50 of the LLC Act (805 ILCS 180/1-50) provides that service of process on an LLC defendant must be made on (a) the LLC’s registered agent or (b) the Secretary of State if the LLC doesn’t appoint a registered agent or where the LLC’s registered agent cannot be found at the LLC’s registered office or principal place of business.

In the context of a dissolved LLC, the LLC Act provides that an LLC continues post-dissolution solely for the purpose of winding up.  This is in contrast to the corporate survival statute that provides that a dissolved (non-LLC) corporation continues for five years after dissolution (This means the defunct corporation can be sued and served for up to five years after dissolution.)  805 ILCS 5/5.05.

Here, the plaintiff sued the LLC’s former registered agent over a year after the LLC dissolved.  This was improper service under the LLC Act.  By failing to serve the Secretary of State in accordance with the LLC Act, the court lacked jurisdiction over the LLC.  (¶¶ 37-40)

The Court also rejected the plaintiff’s argument that the erstwhile LLC members waived their objection to jurisdiction over the LLC by participating in post-judgment proceedings.

Since a party who submits to a court’s jurisdiction does so only prospectively, not retroactively, the party’s appearance doesn’t activate an earlier order entered in the case before the appearance was filed. (¶¶ 40-42)

Another reason the Court voided the default judgment was the “substantial justice” standard which governs whether a court will vacate a judgment under Code Section 2-1301(e). 

The reason Section 2-1301 applied instead of the harsher 2-1401 was because the judgment wasn’t final.  It wasn’t final because at the time the judgment was entered, the plaintiff had a pending claim against another party that wasn’t disposed of.  ((¶¶ 46-47)

Under Illinois law, a default judgment is a drastic remedy and Illinois courts have a long and strong policy of deciding cases on the merits instead of on procedural grounds.  In addition, when seeking to vacate a non-final default order, the movant does not have to show a meritorious defense or diligence in presenting the defense.

Applying these default order guideposts, the Court found that substantial justice considerations dictated that the default judgment be vacated.  Even though the judgment was entered some five years before the motion to vacate was filed, it wasn’t a final order. 

This meant the LLC member movants did not have to show diligence in defending the action or a meritorious defense.  All the members had to demonstrate was that it was fair and just that they have their day in court and that they should be able to defend the plaintiff’s unlawful transfers allegations. (¶¶ 49, 51)

Afterwords: This case provides a useful summary of the key rules that govern how to serve LLC’s and particularly, dissolved LLC’s.  The case’s “cautionary tales” are to (i) serve corporate defendants in accordance with statutory direction; and (ii) always request a finding of finality for default judgments where there are multiple parties or claims involved.

Had the plaintiff received a finding of finality, the LLC members’ motion to vacate would have been untimely under Section 2-1401 – which requires a motion to attack a final judgment to be brought within two years and has a heavier proof burden than a 2-1301 motion.  Still, it wouldn’t have mattered here. The plaintiff’s failure to properly serve the LLC meant the judgment was void and could have been attacked at any time.

 

Paralegal Fees Can Be Tacked On to Attorney Fees Sanctions Award – IL First Dist.

Aside from its trenchant discussion of the constructive fraud rule in mechanics lien litigation, the Illinois First District in Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666 clarified that a paralegal’s time and services can be added to a claim for attorneys’ fees as a sanction against a losing party who files false pleadings.

In an earlier post, I discussed how the lien claimant in this case lost its lien foreclosure suit for misstating the completion of work date and inflating the monetary value of work and materials it affixed to the subject site.  The property owner and a lender defendant filed a fee petition and sanctions motion, respectively.

Examining the lender’s motion for Rule 137 sanctions, the Court stated some black-letter rules that govern fee petitions:

  • Under Rule 137, a party can recover attorneys’ fees incurred as a result of a sanctionable pleading or paper (one filed without an objectively reasonable legal basis);
  • Typically, “overhead” expenses aren’t compensable in a fee motion.  The theory is that overhead costs are already built into an attorneys’ hourly rate;
  •   Overhead includes telephone charges, in-house delivery charges, photocopying, check processing, and in-house paralegal and secretarial services;
  • However, when a paralegal performs a specialized legal task that would normally be performed by an attorney, the paralegal’s fees are recoverable since those services would not be considered overhead.

The Court found that the lender’s paralegals performed myriad services that would normally be done by an attorney – namely, researching the title history of the subject property and preparing a memorandum summarizing the title history.  By contrast, a paralegal’s general administrative tasks were disallowed by the court and could not be sought in the sanctions motion.

Afterwords:

When preparing a fee petition, the prevailing party should also include paralegal time and services; especially if they involve researching real estate land records and summarizing a title history.  While the line separating legal services (which are recoverable) and administrative or overhead expenses (which aren’t) is blurry, Father & Sons stands for the proposition that a fee petition or Rule 137 sanctions motion can be augmented by paralegal fees where the paralegal performs specialized work that contains an element of legal analysis.

 

Substantial Performance of Asset Purchase Agreement Wins the Day in Pancake House Spat

pancakes-155793_960_720The Second District affirmed summary judgment for the plaintiff pancake house (“Restaurant”) seller in a breach of contract action against the Restaurant’s buyer and current operator.  Siding with the seller, the court discussed the contours of the substantial performance doctrine and what kind of evidence a plaintiff must supply to win summary judgment in a contract dispute.

The plaintiff in El and Be, Inc. v. Husain, 2016 IL App (2d) 150011-U, sold the Restaurant for about $500K pursuant to an Asset Purchase Agreement (APA).   The defendant failed to pay the agreed purchase price when it learned the plaintiff had several unpaid vendor bills, utility debts and a lien lawsuit was filed in Texas against Restaurant equipment by a secured creditor of the plaintiff.  The plaintiff sued for breach of contract to recover the APA purchase price and the defendant counterclaimed for fraud and breach of the APA.  The trial court entered summary judgment for the plaintiff on its claims as well as defendants’ counterclaims.

Affirming summary judgment for the plaintiff, the Second District framed the salient issue as whether the plaintiff substantially performed its APA obligations.

Perfect performance isn’t required to enforce a contract.  Instead, a plaintiff must show he substantially performed.  Substantial performance is hard to define and is a fact-based inquiry.  In deciding whether substantial performance has occurred, a court considers whether a defendant received and enjoyed the benefits of the plaintiff’s performance.  Substantial performance allows a plaintiff to win a breach of contract suit; especially where his performance is done in reliance on the parties’ contract.

The court found that the defendant Restaurant buyer clearly benefitted from the plaintiff’s performance.  The buyer gained the Restaurant assets and goodwill and operated the Restaurant continuously for over a year before plaintiff sued to enforce the APA.  The defendant’s operation of the Restaurant during this pre-suit period was a tangible benefit flowing to the defendant from the plaintiff’s APA performance.  (¶¶ 25-27).

Next, the Court rejected the defendant’s fraud counterclaim – premised on plaintiff’s failure to disclose outstanding debts prior to the Restaurant sale.  The defendant claimed this omission exposed the defendant to a future lien foreclosure action and a possible money judgment by plaintiff’s creditors.

In Illinois, a fraud plaintiff must establish (1) a false statement of material fact, (2) the statement maker’s knowledge or belief that the statement was false; (3) an intention to induce the plaintiff to act based on the statement, (4) reasonable reliance on the truth of the statement by the plaintiff, and (5) damage to the plaintiff resulting from the reliance.  A fraud claimant must also prove damages (monetary loss, e.g.) with reasonable certainty.  While mathematical precision isn’t required, fraud damages that are speculative or hypothetical won’t support a fraud suit.

Here, since the defendant made only generalized allegations of possible damages and could not point to actual damages evidence – such as having to defend a lien foreclosure suit or a money judgment – the fraud claim failed.  On summary judgment, a litigant must offer evidence to support its claims.  The defendant’s failure to produce measurable damages evidence stemming from plaintiff’s pre-sale omissions doomed the fraud claim.  (¶¶ 33-36)

Afterwords:

El and Be, Inc. cements the proposition that perfect performance isn’t required to enforce a contract.  Instead, a breach of contract plaintiff must show substantial performance – that he performed to such a level that the defendant enjoyed tangible benefits from the performance.  Where a contract defendant clearly reaps monetary awards from a plaintiff’s contractual duties, the substantial performance standard is met.

The case also makes clear that fraud must be pled and proven with acute specificity and that vague assertions of damages without factual back-up won’t survive summary judgment.

 

Lien Inflation and “Plus Factors” – Constructive Fraud in Illinois Mechanics Lien Litigation

The contractor plaintiff in Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666 was caught in several lies in the process of recording and trying to foreclose its mechanics lien.  The misstatements resulted in the nullification of its lien and the plaintiff being on the hook for over $40K in opponent attorneys’ fees.

The plaintiff was hired to construct a deck, garage and basement on the defendant owner’s residence.  Inexplicably, the plaintiff recorded its mechanics lien 8 months before it finished its work. This was a problem because the lien contained the sworn testimony of plaintiff’s principal (via affidavit) that stated a completion date that was several months off.

Plaintiff then sued to foreclose the lien; again stating an inaccurate completion date in the complaint.  The owner and mortgage lender defendants filed separate summary judgment motions on the basis that the plaintiff committed constructive fraud by (1) falsely stating the lien completion date and (2) inflating the dollar value of its work in sworn documents (the affidavit and verified complaint).

Affirming summary judgment and separate fee awards for the defendants, the Court distilled the following mechanics lien constructive fraud principles:

  • The purpose of the mechanics lien act (Lien Act) is to require someone with an interest in real property to pay for property improvements or benefits he encouraged by his conduct.  Section 7 of the Lien Act provides that no lien will be defeated because of an error or if it states an inflated amount unless it is shown that the erroneous lien amount was made with “intent to defraud.”  770 ILCS 60/7;
  • The intent to defraud requirement aims to protect the honest lien claimant who simply makes a mistake in computing his lien amount.  But where there is evidence a lien claimant knowingly filed a false lien (either in completion date or amount), the lien claim will be defeated.  (¶¶ 30-31);
  • Where there is no direct proof of a contractor’s intent to defraud, “constructive fraud” can negate a lien where there is an overstated lien amount or false completion date combined with additional evidence;
  • The additional evidence or “plus factor” can come in the form of a false affidavit signed by the lien claimant that falsely states the underlying completion date or the amount of the improvements furnished to the property.  (¶ 35).

Based on the plaintiff’s multiple false statements – namely, a fabricated completion date and a grossly exaggerated lien amount based on the amount of work done – both in its mechanics lien and in its pleadings, the court found that at the very least, the plaintiff committed constructive fraud and invalidated the lien.

Attorneys’ Fees and Rule 137 Sanctions

The court also taxed the property owners’ attorneys’ fees to the losing contractor.  Section 17 of the Lien Act provides that an owner can recover its attorneys’ fees where a contractor files a lien action “without just cause or right.”  The Lien Act also specifies that only the owner – not any other party involved in the chain of contracts or other lienholders – can recover its attorneys’ fees.  A lien claim giving rise to a fee award is one that is “not well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law.”  770 ILCS 60/17(d).

Based on the contractor’s clear case of constructive fraud in filing a lien with a false completion date and in a grossly excessive sum, the court ordered the contractor to pay the owner defendants’ attorneys’ fees.

The lender – who is not the property owner – wasn’t entitled to fees under Section 17 of the Lien Act.  Enter Rule 137 sanctions.  In Illinois, Rule 137 sanctions are awarded to prevent abuse of the judicial process by penalizing those who file vexatious and harassing lawsuit based on unsupported statements of fact or law.  Before assessing sanctions, a court does not engage in hindsight but instead looks at what was objectively reasonable at the time an attorney signed a document or filed a motion.

Because the plaintiff contractor repeatedly submitted false documents in the course of the litigation, the court awarded the mortgage lender its attorneys’ fees incurred in defending the lien suit and in successfully moving for summary judgment.  All told,  the Court sanctioned the contractor to the tune of over $26,000; awarding this sum to the lender defendant.

Afterwords:

This case serves as an obvious cautionary tale for mechanics lien plaintiffs.  Plainly, a lien claimant must state an accurate completion date and properly state the monetary value of improvements.  If the claimant realizes it has made a mistake, it should amend the lien.  And even though an amended lien usually won’t bind third parties (e.g. lenders, other lienholders, etc.), it’s better to correct known lien errors than to risk a hefty fee award at case’s end.

 

 

 

 

Fraud Suit Dismissed Where Prior Corporate Dissolution Claim Pending Between Parties – IL Court

Illinois courts aim to foster efficiency and finality in litigation. One way they accomplish this is by protecting people from repetitive lawsuits and requiring plaintiffs to bring all their claims in a single case.  Consolidation of claims is encouraged while piecemeal “claim splitting” is discouraged.

Code Section 2-619(a)(3) is a statutory attempt to streamline litigation. This section that allows for dismissal of a case where there is another action pending between the same parties for the same cause.

Schact v. Lome, 2016 IL App(1st) 141931 provides a recent case illustration of this section in the context of an aborted medical partnership.

The defendant originally filed suit in 2010 against two of his former medical partners to void their attempt to dissolve a medical corporation operated by them. The parties litigated that case for over three years before the plaintiffs (who were the defendants in the 2010 case) filed suit in 2013 for fraud.

The 2013 fraud action alleged the defendant fraudulently induced the plaintiffs to agree to a distribution of the medical corporation’s assets knowing that he (defendant) was going to challenge the corporate dissolution.

According to the plaintiffs, the defendant received almost $50,000 in cash on top of some corporate equipment based on his promise to end the 2010 litigation. Plaintiffs claimed the defendant hoodwinked them into agreeing to the money and property disbursements based on the defendant’s assurance he would dismiss the prior lawsuit.

The trial court dismissed the fraud action based on the same parties, same cause rule.  Affirming dismissal, the appeals court provided content to the “same cause” element of a Section 2-619 motion to dismiss.

  • Illinois Code Section 2-619(a)(3) is a procedural device aimed at avoiding duplicative litigation. It applies where there is a pending case involving the same parties for the same cause.
  • Lawsuits present the same cause when the relief sought is “based on substantially the same set of facts”;
  • The salient inquiry is whether both cases arise from the same transaction or occurrence, not whether the two lawsuits have identical causes of action or legal theories;
  • If the relief requested in each lawsuit relies on substantially the same facts, the “same cause” is met and can present grounds for dismissal.

(¶¶ 35-36)

In finding the same cause test met, the Court noted the 2010 dissolution action and the 2013 fraud suit were “inextricably intertwined.” Both cases involved a challenge to the plaintiffs’ earlier attempted breakup of the medical corporation.  Both cases also centered on the defendant’s conduct in agreeing to a distribution of the corporate assets while at the same time contesting those distributions.  Another commonality between the two suits was the damages claimed by the plaintiffs in the fraud action equaled the defense costs they incurred in the 2010 dissolution action. (¶ 37).

Since both lawsuits involved the same underlying facts, had similar issues and were based on the same conduct by the parties, the 2013 fraud action was properly dismissed since the 2010 dissolution action was still pending when the fraud case was filed.

Take-aways:

Once again, considerations of judicial economy win out over opposing claims that two lawsuits are different enough to proceed on separate tracks.

Schact gives a broad reading to a somewhat nebulous basis for dismissal.  The case stresses that the legal theories advanced in two lawsuits don’t have to be identical to trigger the same cause element of Section 2-619.

Schact’s lesson is clear: Where two lawsuits between the same parties share common issues and stem from substantially similar facts, a defendant will have a strong argument that the later-filed case should be dismissed under the same cause Code section.

Denial of Motion for Judgment in Citation Proceedings Not Final – Appeal Dismissed (IL 1st Dist.)

While there are nuances and some exceptions to it, the general rule is that only “final” orders are appealable.  If a trial court’s order is final, the losing party can appeal it.  If the order isn’t final – meaning, the case is still going on – the losing party can’t appeal it.  Whether an order is final is often overlooked during the heat of trial battle.  However, as today’s feature case illustrates, the failure to appreciate the final versus non-final order distinction can doom an appeal as premature.

National Life Real Estate Holdings, LLC v. International Bank of Chicago, 2016 IL App (1st) 151446, the plaintiff judgment creditor won a $3MM-plus judgment against an individual and two LLC defendants. In trying to enforce the money judgment, the plaintiff issued a third-party citation to IBC, the respondent and defendant.

Upon learning that after IBC disbursed $3.5MM in loan funds to two businesses associated with the individual judgment debtor after it received the third-party citation, the plaintiff moved for judgment against IBC on the basis that it violated its obligations as a third-party citation respondent (to not transfer any of the judgment debtor’s property).

The circuit court denied the plaintiff’s motion.  It found that since the loan funds disbursed by IBC were not paid to and didn’t belong to the judgment debtor, IBC did not flout the citation’s “restraining provision” (which prevents a citation respondent from disposing of property belonging to a judgment debtor).  Affirming, the appeals court discussed the pertinent rules governing when orders entered in post-judgment proceedings can be appealed.

  • An appeal can only be taken from a “final order”‘
  • An order is final where it disposes of the rights of the parties, either upon the entire lawsuit or upon a separate and definite part of it;
  • A final order entered in a post-judgment proceeding is appealable, too;
  • A post-judgment order is deemed final when the judgment creditor is in a position to collect against the judgment debtor or third-party or the judgment creditor is prevented from doing so by court order;
  • A post-judgment order that does not (a) leave a creditor in position to collect a judgment or that (b) conclusively bars the creditor from collecting, is not final for purposes of appeal. 

(¶10); See 735 ILCS 5/2-1402; Ill. Sup. Ct. R. 304(b)(4).

The trial court’s order denying the judgment creditor’s motion for judgment wasn’t final as it didn’t end the lawsuit.  The appeals court noted the case is still pending and the judgment creditor may still have valid claims against IBC.  Since the trial court’s denial of the judgment creditor’s motion didn’t foreclose it from future collection efforts, the denial of the motion wasn’t a final and appealable order.  As a consequence, the creditor’s appeal was premature and properly dismissed.

Afterwords:

In hindsight, the plaintiff should have requested a Rule 304(a) finding that the order denying the motion for judgment was appealable.  While the court could have denied the motion, it would have at least give the creditor a shot at having an appeals court review the trial court’s order.

Going forward, the plaintiff should issue third-party citations to the loan recipients (the two business entities) and see if it can link the individual debtor to those businesses.  The plaintiff should also issue discovery to IBC to obtain specifics concerning the post-citation loan.  This information could give the plaintiff ammunition for future litigation against IBC relating to the loans.

 

Car Seller’s Impossibility and Commercial Frustration Defenses Fail In Missing Mercedes Case – IL ND

SFcitizen (photo credit: www.sfcitizen.com (visited 7.6.15))

Sunshine Imp & Exp Corp. v. Luxury Car Concierge, Inc., 2015 WL 2193808 (N.D.Ill. 2015) serves as a recent example of how difficult it is for a breach of contract defendant to successfully argue the impossibility or commercial frustration defense.

There, a case involving multiple layers of interconnected luxury car sellers, the plaintiff car seller sued another seller for breach of contract when the defendant’s failed to deliver a $100k Mercedes to the plaintiff.

The defendant blamed one of its vendors’ for failing to produce the car.  That vendor, in turn, cited the embezzlement of one of its sellers as the cause of the breach.

The defendant argued that since it couldn’t control the various parties involved in acquiring the car, it was immunized from liability under the impossibility and commercial frustration defenses.

The court rejected the defenses and entered judgment for the plaintiff for the full amount paid for the no-show Mercedes.

The defendant first made a procedural challenge to plaintiff’s suit.  It argued that since the plaintiff never formally responded to defendant’s affirmative defenses, the plaintiff waived its challenge to them.  The court quickly disposed of this argument.  While under Illinois law, the failure to object to an affirmative defense can result in the admission of the defense and a waiver of a right to contest it, this isn’t the case in Federal cases.

This is because Federal procedural rules govern Federal cases and under FRCP 8(b), if a responsive pleading isn’t required, an allegation in a defense is considered denied or avoided.  Moreover, FRCP 7(a) specifies the types of pleadings that are allowed and a reply to an affirmative defense isn’t one of them.  As a result, affirmative defenses raised in an answer are automatically deemed denied in the Federal scheme since no reply to affirmative defenses are permitted (unless ordered by the court).

The defendant’s impossibility of performance and commercial frustration defenses also failed substantively.

The impossibility doctrine applies where there is  an unanticipated circumstance that makes performance “vitally different” from what was or should have been within the reasonable contemplation of the parties.  Impossibility applies in very limited situations – parties to a contract normally must adhere to the agreement terms and subsequent contingencies that aren’t spelled out in a contract won’t invalidate the contract.

What’s more, the fact that a promisor can’t control the acts of a third party won’t trigger the impossibility defense unless the contract explicitly says so.  What’s more, a contracting promisor isn’t absolved of his obligations due to a third party’s failure to perform.

The court found the defendant’s impossibility defense lacking since it was (or should have been) foreseeable that the defendant’s supplier would have failed to deliver the car for any number of reasons.

(**3-4).

The defendant’s related defense of “commercial frustration” also fell short.  This defense applies in two circumstances: (1) where a frustrating event isn’t foreseeable and (2) that event totally or almost totally destroys the value of the party’s performance.  An example of this is where the destruction of a building terminates the lease.

Like impossibility, commercial frustration applies sparingly; it is only where a party’s performance is rendered “meaningless” due to the unforeseen circumstance that the contract terminates.  The defense becomes operative where a contract assumes the continued existence of a certain state of things and that state of things ceases to exist.

A successful commercial frustration defense voids the contract and requires any monies paid to be returned to the paying party.

The court discarded the defendant’s commercial frustration defense on the basis that the defendant could have foreseen that its supplier would have failed to tender the Mercedes.  Since the defendant failed to negotiate this possibility into the contract, the defense failed.  (**5-6).

Take-aways:

The procedural lesson is that a formal response to an affirmative defense isn’t required in Federal court unless required by the court.

The case’s chief legal point is that in contracts where a party’s performance is dependent on that of a third party/parties, the party should spell this out in the contract.  Failing that, the contract will likely be enforced as written even though the breach is caused by someone’s else’s failure to perform.

Getting E-Mails Into Evidence: (Ind.) Federal Court Weighs In

IMG_0924

Since e-mail is the dominant form of business communication across the globe, it’s no surprise that it comprises a large chunk of the documents used as evidence at a business dispute trial.

Email’s prevalence in lawsuits makes it crucial for litigators to understand the key evidence authenticity and foundational rules that govern whether an email gets into evidence.  This is especially true where an email goes to the heart of a plaintiff’s claims (or defendant’s defenses) and the e-mail author or recipient denies the e-mail’s validity.

Finnegan v. Myers, 2015 WL 5252433 (N.D. Ind. 2015), serves as a recent example of a Federal court applying fundamental evidence rules to the e-mail communications context.

In the case, the plaintiffs, whose teenaged daughter died under suspicious circumstances, sued various Indiana child welfare agencies for lodging criminal child neglect charges against them that were eventually dropped.  The plaintiffs then filed Federal civil rights and various due process claims against the defendants.

The defendants moved for summary judgment and then sought to strike some of plaintiffs’ evidence opposing summary judgment.  A key piece of evidence relied on by the plaintiff in opposing summary judgment that the defendants sought to exclude as improper hearsay was an e-mail from a forensic pathologist to child welfare personnel that called into questions the results of a prior autopsy of the deceased.

Denying defendants’ two motions (the summary judgment motion and motion to strike), the Court provides a useful gloss on the operative evidence rules that control e-mail documents in litigation.

  • The Federal Rules of Evidence (FRE) require a proponent to produce evidence sufficient to support a finding the item is authentic – that it is what the proponent claims it to be;
  • FRE 901 recognizes several methods of authentication including witness testimony, expert or non-expert comparisons, distinctive characteristics, and public records, among others;
  • FRE 902 recognizes certain evidence as inherently trustworthy and “self-authenticating” (requiring no additional proof of authenticity).  Evidence in this camp includes public records, official publications, newspapers and periodicals, commercial paper, and certified domestic records of a regularly conducted activity;
  • Authentication only relates to the source of the documents – it does not mean that the documents’ contents are taken as true;
  • E-mails may be authenticated by circumstantial evidence such as (a) viewing the e-mail’s contents in light of the factual background of the case, (b) identifying the sender and receiver via affidavit, (c) identifying the sender by the e-mail address from which the e-mail was sent, (d) comparing the email’s substance to other evidence in the case, and (e) comparing the e-mail to other statements by the claimed author of a given email.

(** 5-6)

Applying these guideposts, the court found that the plaintiff sufficiently established that the subject email was genuine (i.e., it was what it purported to be) and that it was up to the jury to determine what probative value the email evidence had at trial.

The court also agreed with the plaintiff that the pathologist’s email wasn’t hearsay: it was not used for the truth of the email.  Instead, it was simply used to show that the State  agency was put on notice of a second autopsy and changes in the pathologist’s cause of death opinions.

Afterwords:

This case resonates with me since I’ve litigated cases in the past where a witness flatly denies sending an email even though it’s from an e-mail address associated with the witness.  In those situations. I’ve had to compile other evidence – like the recipient’s affidavit – and had to show the denied email is congruent with other evidence in the case to negate the denial.

Finnegan neatly melds FRE 901 and 902 and provides a succinct summary of what steps a litigator must take to establish the authenticity of e-mail evidence.

Landlord Subject to Potential Bailment and Intentional Infliction Claims for Leaving Tenant’s Property On Sidewalk – IL ND

The Internet is awash in state-by-state summaries of what a landlord can and can’t do with property left behind by a residential tenant. The various abandoned property rules range from making the landlord do nothing, to requiring it to hold the tenant’s property for a fixed number of days, to sending formal notice to the tenant before disposing of the property. For a good summary of various state’s abandoned property laws, see here.  Chicago’s (where I practice) Residential Landlord Tenant Ordinance (RLTO), widely viewed as pro-tenant in every way, requires a landlord to store the property for seven days before disposing of it. See RLTO 5-12-130(f)

Zissu v. IH2 Property Illinois, LP, 2016 WL 212937, examines what causes of action apply where a landlord puts an evicted tenant’s property on a city street and the property is destroyed or stolen as a result.

The plaintiffs, who were evicted in an earlier state court forcible detainer action, sued their ex-landlord in Federal court (the landlord was a Delaware business entity) alleging negligence, conversion, bailment, and intentional infliction of emotional distress after the former landlord placed the plaintiff’s home furnishings, jewelry and personal documents on the sidewalk and the plaintiff’s property was stolen or damaged.

Granting in part and denying in part the landlord’s motion to dismiss, the court examined the pleading elements of the bailment, trespass to chattels and intentional infliction of emotional distress torts.

The court upheld the plaintiff’s bailment count. A bailment occurs where one party delivers goods or personal property to another who has agreed to accept the property and deal with it in a particular way.

To recover under a bailment theory, a plaintiff must allege: (1) an express or implied agreement to create a bailment, (2) delivery of the property to the bailee by the bailor, (3) the bailee’s acceptance of the property, and (4) the bailee’s failure to return the property or delivery of the property to the bailor in a damaged condition.

An implied, or “constructive,” bailment occurs where a defendant voluntarily receives a plaintiff’s property for some purpose other than that of obtaining ownership of the property. The implied bailment can be found with reference to the surrounding circumstances including (i) the benefits received by the parties, (ii) the parties’ intentions, (iii) the kind of property involved, and (iv) the opportunities for each party to exert control over the property.

The court held that the complaint’s allegations that the defendant actively took possession of the plaintiff’s property and removed it from the leased premises was sufficient to state a bailment claim under Federal notice pleading standards.

The court also sustained the plaintiff’s conversion and trespass to chattels claim. The crux of both of these claims is that a defendant either seized control of a plaintiff’s property (conversion) or interfered with a plaintiff’s property (trespass to chattels). A colorable conversion claim contains the added requirement that a plaintiff make a demand for possession – unless the defendant has already disposed of a plaintiff’s property; in which case a demand would be futile.

The court here found that the plaintiffs’ allegations that their former landlord dispossessed plaintiffs of their property stated a trespass to chattels and conversion claim for purposes of a motion to dismiss. The court also agreed with the plaintiff that a formal demand for the property would have been pointless since the defendant had already placed the plaintiffs’ property on the street and sidewalk next to the plaintiffs’ home.

Lastly, the court denied the defendant’s attempt to dismiss the plaintiff’s intentional infliction claim. An intentional infliction of emotional distress plaintiff must plead (1) extreme and outrageous conduct, (2) a defendant’s intent to inflict severe emotional distress on a plaintiff, and (3) the defendant’s conduct did in fact cause the plaintiff emotional distress.

Here, the court found that the plaintiffs’ claims that the defendant put expensive jewelry, medication and sensitive financial documents on the street in view of the whole neighborhood sufficiently stated an intentional infliction claim.

Afterwords:

This case presents an interesting illustration of some lesser-used and venerable torts (bailment, trespass to chattels) adapted to a modern-day fact pattern.

The continued vitality of the bailment and trespass to chattel theories shows that personal property rights still enjoy a privileged status in this society.

The case also serves as a reminder for landlords to check applicable abandoned property laws before disposing of a decamped tenant’s belongings.  As this case amply shows, a landlord who removes tenant property without notice to the tenant, does so at its peril and opens itself up to a future damages action.

 

 

 

Bank’s Business Records and Supporting Affidavit Satisfy Evidence Rules – IL 2nd Dist.

Because they’re so integral to commercial litigation, business records and the myriad evidentiary concerns intertwined with them, are a perennial favorite topic of this blog.

In earlier posts (here and here, I’ve featured US Bank, NA v. Avdic, 2014 IL App (1st) 121759 and Bank of America v. Land, 2013 IL App (5th) 120283, two cases that examine the foundation and authenticity requirements for admitting business records in evidence and probe the interplay between Illinois Supreme Court Rule 236 and Illinois Evidence Rule 803(6).

We now can add Bayview Loan Servicing, LLC v. Szpara, 2015 IL App (2d) 140331 to the Illinois business records cannon.  Harmonized, Avdic, Land and Bayview form a trilogy of key business records cases that are useful (if not required) reading for any commercial litigator.

Bayview’s facts parallel those of so many other business records cases: a mortgage foreclosing plaintiff tries to offer business records into evidence at trial or as support for a summary judgment motion and the defendant opposes the records’ admission.

Bayview’s bank plaintiff tried to get damages in evidence via a prove-up affidavit signed by a bank Vice President who didn’t actually create the records in the first place.  The defendant moved to strike the affidavit as lacking foundation.

Affirming summary judgment for the bank, the First District provides a cogent summary of the governing standards for summary judgment affidavits that are employed to get business records into evidence.

First, the court affirmed dismissal of the defendant’s fraud in the inducement affirmative defense – premised on the claim that a mortgage broker allied with the plaintiff made false statements concerning the defendant’s creditworthiness and value of the underlying property.

Fraud in the inducement is a species of common law fraud.  A fraud plaintiff in Illinois must show (1) a false statement of material fact, (2) knowledge or belief that the statement is false, (3) intent to induce the plaintiff to act or refrain from acting on the statement, (4) the plaintiff reasonably relied on the false statement, and (5) damage to the plaintiff resulting from the reliance.  A colorable fraud claim must be specific with the plaintiff establishing the who, what, and when of the challenged statement.

The Court agreed with the trial court that the defendant’s fraud in the inducement defense was too vague and lacked the heightened specificity required under the law.  The defendant failed to sufficiently plead the misrepresentation and didn’t allege facts showing when the misstatement was made.  As a result, the defense was properly stricken on the bank’s motion. (¶¶ 34-35)

The court then found that the plaintiff’s business records – appended to a bank employee’s affidavit in support of the bank’s summary judgment motion –  were properly admitted into evidence and affirmed summary judgment for the bank.

Illinois Supreme Court Rule 236 and Illinois Evidence Rule 803(6)(“Records of Regularly Conducted Activity”) provide that a business record can be admitted into evidence as an exception to the hearsay rule if (1) the record was made in the regular course of business and (2) was made at or near the time of the events documented in the records.

In  the context of a prove-up affidavit based on business records, the affiant doesn’t have to be the one who personally prepared the record; it’s enough that the affiant has basic familiarity with the records and the business processes used by the party relying on them.

Under Evidence Rule 803(6), the lack of personal knowledge of someone signing an affidavit does not affect the admissibility of a given document, although it could affect the (evidentiary) weight given to that document.   (¶42).

The bank’s Vice President in Bayview testified in her prove-up affidavit that she had access to the business records relating to defendant’s loan, that she reviewed the records, had personal knowledge of how the plaintiff kept and prepared them and that the plaintiff’s regular practice was to keep loan records like the ones attached to the affidavit.

The court rejected the defendant’s argument that the affidavit was deficient since the bank agent wasn’t who created the attached loan records.  Citing to Avdic and Land, the Court found that, in the aggregate, the bank agent affidavit testimony sufficiently met the foundation and authenticity requirements to get the business records in evidence. (¶¶ 41-46)

Afterwords:

This case contains salutary discussion and rulings for plaintiff creditors as it streamlines the process of getting business records into evidence at the summary judgment stage and later, at trial.

Bayview reaffirms the key holdings from Avdic, Land and business records cases like them that an agent who had nothing to do with preparing underlying business records can still attest to the records’ validity and authenticity provided she can vouch for their validity and is familiar with the mode of the records’ creation.

Voluntary Payment of Wages Sinks Transit Agency’s Conversion Counterclaim Against Ex-Employees – IL ND

In Laba v. CTA, 2016 WL 147656 (N.D.Ill. 2016), the Court considers the contours of the conversion tort in a dispute involving former Chicago Transit Authority (CTA) employees who lied about their hours worked.

The CTA claimed the employees converted or “stole” paycheck monies by falsifying employee time records in order to get paid by the agency.

The Court dismissed the CTA’s conversion claim based on the involuntary payment doctrine.  Conversion applies where a plaintiff shows (1) a defendant exercised unauthorized control over the plaintiff’s personal property; (2) plaintiff’s right to immediate possession of the property; and (3) a demand for possession of the property.  

A colorable conversion claim must involve specifically identifiable property.  Money can be the subject of  a conversion claim but it must be a specific source of funds.  A general obligation (“John owes me money and so he basically stole from me,” e.g.) isn’t enough for actionable conversion.

A well-established conversion defense is the voluntary payment rule.  This rule posits that where one party voluntarily transfers property to another, even if the transfer is mistaken, there is no conversion.  In such a case, there is a debtor-creditor relationship: the debtor would be the person to whom the funds were paid and the creditor the paying party. 

Here, since the CTA voluntarily paid money to the employees, in the form of regular paychecks, those monies could not be subject to a later conversion suit.  The CTA did not pay the ex-workers under duress.  The fact that the workers may not have earned their pay doesn’t change the analysis.  At most, according to the court, the time sheet embellishments created a “general debt arising from fraudulent conduct.”  The CTA has a remedy to recoup the funds; it’s just not one for conversion. 

Afterwords:

This case presents a creative use of the conversion tort in an unorthodox fact setting.  The case lesson is clear: where an employer pays an employee of the employer’s own volition, the payment will be considered “voluntary” even where it turns out the employee didn’t deserve the payment (i.e. by not working).  In such a case, the employer’s appropriate remedy is one for breach of contract or unjust enrichment.  A civil conversion claim will not apply to voluntarily employer-employee payments.

“Mirror-Image” Contract Acceptance: 7th Circuit Finds Attorneys’ Fees Provision in Invoice Not Binding on Food Buyer

VLM Food Trading International, Inc. v. Illinois Trading Co., (http://cases.justia.com/federal/appellate-courts/ca7/14-2776/14-2776-2016-01-21.pdf?ts=1453404644) considers whether a seller can recover attorneys’ fees where the contract doesn’t provide for fees but the invoices sent after the goods are shipped do have fee-shifting language.   

The Seventh Circuit held that the invoice fee-shifting clause does not bind the buyer.

The Contract Chronology: The plaintiff foods seller would submit a purchase order to defendant that stated the product, price, quantity and delivery locus.  The defendant, in turn, would send a confirming e-mail to the plaintiff.  After that, the plaintiff shipped the goods to the defendant and later sent a “trailing” invoice to the defendant.

The first appearance of the fee-shifting language in the contracting sequence were found in the trailing invoices sent after the seller’s items were shipped to the defendant.

The main dispute centered on when the contract was formed and whether the trailing invoices’ fees provisions were part of the contract. 

An international treaty – the U.N. Convention on Contracts for the International Sale of Goods (the “Convention”) – happened to govern this dispute.  The Convention applies a derivation of the common law “mirror image” rule of contract interpretation: an acceptance must “mirror” the offer or else it’s construed as a counter-offer.  

Under the mirror image rule, any additional terms or qualifications to the offer are considered proposed modifications.  A party doesn’t have to object to a proposed modification to exclude (reject) it.  Any term not contained in the offer and acceptance simply do not bind the parties.  What’s more, one’s silence or inactivity doesn’t equal acceptance of the proposed offer changes.  A party can only accept the terms through a statement or conduct.

The Seventh Circuit held that the plaintiff’s purchase orders were the offer, and the buyer’s confirming e-mails were the acceptance.  Any terms proposed outside the scope of the purchase orders or emails were not part of the parties’ agreement.  Since the plaintiff’s trailing invoices (and their fee-shifting and interest language) were sent after the acceptance, they didn’t bind the buyer.

The Court rejected the plaintiff’s trade usage argument – that buyer assented to the fee provision by not objecting to the invoice language.  Again, under the mirror image rule, the buyer’s silence isn’t considered acceptance.  The Court also found that trade usage only applies where there is contractual ambiguity.  Here, the contract was clear and so there was no reason to consider any course of conduct or trade usage evidence.

Finally, the Court found the defendant did not manifest an intent to adhere to the invoice fee language.  The key factor on this point was the trailing invoices were sent to defendant’s generic billing address; they weren’t sent to a specific corporate decision-maker. 

Take-aways:

VLM is interesting reading to me since I’ve encountered this exact fact pattern several times through the years in my commercial litigation practice.  The case chronicles a typical multi-step goods contract involving commercial entities.  

In a case where an international treaty doesn’t govern, fee language can be considered part of the contract under the Uniform Commercial Code if it is standard practice in an industry to have after-the-fact fee provisions in invoices or the parties’ course of conduct shows an intent to hew to the invoice fee-shifting clause. 

VLM offers a useful analysis of the factors a court considers when determining whether after-the-fact contractual terms can bind the parties.

 

 

 

Material Changes to Office Lease Insulates Guarantor From Liability For Corporate Tenant Defaults – Illinois Court

The Illinois First District recently examined the reach of a corporate officer’s commercial lease guaranty in a case involving a multi-year and multi-suite office lease.  The office landlord plaintiff in Stonegate Properties, Inc. v. Piccolo, 2016 IL App (1st) 150182, sued to hold a corporate tenant’s CEO and lease guarantor liable for rental damages after the corporate tenant defaulted and declared bankruptcy.

The five-year lease was amended several times through the years – each time by the corporate tenant through its CEO and lease guarantor – culminating in an amended lease for three additional office spaces (compared to the original lease’s two spaces) in nearly triple the monthly rent amount from the original lease.

After the corporate tenant defaulted and filed for bankruptcy protection, the plaintiff landlord sued the guarantor defendant to recover nearly $1.4M in unpaid lease rental payments. The guarantor defendant successfully moved to dismiss on the basis that she was released from the guaranty since the lease parties made material changes to the lease and increased the guarantor’s risk with no additional consideration to the guarantor.

Affirming, the First District examined the scope of guarantor liability when the lease guarantor is also the corporate tenant’s principal officer.

The Court cited and applied these operative contract law principles in siding for the guarantor:

– A lease is a contract between a landlord and tenant, and the general rules of contract construction apply to the construction of leases;

– A guaranty is a promise by one or more parties to answer for the debts of another.  A clearly-worded guaranty should be given effect as written;

– A guaranty is considered a separate, independent obligations from the underlying contract.  Where a guaranty is undated, a court will still consider it as drafted contemporaneously with the underlying lease if the guaranty refers to that lease;

– A guaranty signed at the same time as the underlying contract is supported by adequate consideration.  A contractual modification – something that injects new elements into a contract – must be supported by consideration to be valid and binding.  Pre-existing obligations are not sufficient consideration under the law;

– In the context of commercial lease guaranties, a guaranty’s term is only extended if the underlying lease term is also extended in accordance with the lease terms;

– Common guaranty defenses involve changes to the underlying contract that materially increase the guarantor’s financial risk;

– Where the risk originally assumed by a guarantor is augmented by acts of the principal (the person whose debts are being guaranteed), the guarantor is released from his contractual obligations;

– Where a corporate principal signs a lease in her corporate capacity, she is not personally responsible for her corporate employer’s lease obligations.  This is because a corporation is a separate legal entity from its component shareholders.

(¶¶ 40-45, 46-55, 60-62, 65-66)

Applying these principles, the Court sided in favor of the guarantor.  The court noted that the lease addendum materially modified the underlying lease obligations and increased the guarantor’s fiscal risk. In addition, the guaranty was silent on whether it applied to material lease modifications.  Because of this, the court found that the guarantor’s consent to the lease changes was required in order to bind the guarantor to the changes.

Since the guarantor never gave her express consent to the lease changes (broadening the leased premises from two office suites to 5; tripling the monthly rent), she was immunized from further guaranty obligations once the corporate tenant and office landlord signed the lease addendum.

The Court also rejected the office lessor’s attempt to fasten liability to the guarantor under a piercing the corporate veil/alter-ego theory.  Since the plaintiff didn’t sue to pierce the corporate veil (such as under an alter-ego theory), the Court found that the guarantor’s execution of the lease addendum as an agent of the corporate tenant didn’t bind the defendant personally to the corporation’s lease obligations. (¶¶ 72-77).

Afterwords:

Stonegate provides a thorough analysis of the contours of a commercial lease guarantor’s liability.  While a guaranty is construed as written under black-letter contract law principles, if the guarantor’s principal (here, the corporate tenant) changes the underlying lease obligation so that the guarantor’s original risk is increased, the change in lease term will not be binding on the guarantor.  This is so even where the corporate agent who agreed to the material lease amendment is the lease guarantor.

False Info in Employee Time Records Can Support Common Law Fraud Claim – IL Fed Court

Some key questions the Court grapples with in Laba v. CTA, 2016 WL 147656 (N.D.Ill. 2016) are whether an employee who sleeps on the job or runs personal errands on company time opens himself up to a breach of fiduciary or fraud claim by his employer.  The Court answered “no” (fiduciary duty claim) and “maybe” (fraud claim) in an employment dispute involving the Chicago Transit Authority (CTA).

Some former CTA employees sued the embattled transit agency for invasion of privacy and illegal search and seizure after learning the CTA implanted Global Positioning System (“GPS”) technology on the plaintiffs’ work-issued cell phones. An audit of those phones revealed the plaintiffs’ regularly engaged in personal frolics during work hours.

The CTA removed the case to Federal court and filed various state law counterclaims to recoup money it paid to the ex-employees including claims for breach of fiduciary duty, fraud and conversion. The Northern District granted in part and denied in part the plaintiff’s motion to dismiss the CTA’s counterclaims.

Breach of Fiduciary Duty

Sustaining the CTA’s breach of fiduciary duty claim against the ex-employees’ motion to dismiss, the Court looked to black-letter Illinois law for guidance.  To state a breach of fiduciary duty claim in Illinois, a plaintiff must allege (1) the existence of a fiduciary duty, (2) breach of that duty, and (3) breach of the duty proximately caused damages.  The employer-employee relationship is one the law recognizes as a fiduciary one.

While the extent of an employee’s duty to his employer varies depending on whether the employee is a corporate officer, the law is clear that employees owe duties of loyalty to their employers.  Where an employee engages in self-dealing or misappropriates employer property or funds for the employee’s personal use, it can give rise to a fiduciary suit by the employer.

Here, the Court found that the employees’ conduct, while irresponsible and possibly negligent, didn’t rise to the level of disloyalty under the law.  The Court made it clear that under-par job performance doesn’t equate to conduct that can support a breach of fiduciary duty claim. (**6-7).

Fraudulent Misrepresentation

The Court upheld the CTA’s fraudulent misrepresentation claim – premised on the allegation that the plaintiffs lied to the CTA about the hours they were working in order to induce the CTA to pay them.  Under Illinois law, a fraud plaintiff must show (1) a false statement of material fact, (2) known or believed to be false by the party making the statement, (3) with the intent to induce the statement’s recipient to act, (4) action by the recipient in reliance on the truth of the statement, and (5) damage resulting from that reliance.

Under the Federal pleading rules, a fraud claimant must plead the “who, what, where when and how” of the fraud but the allegation of a defendant’s intent or knowledge can be alleged generally.

Here, the Court found that the CTA sufficiently alleged a fraudulent scheme by the employees to misrepresent the hours they worked in exchange for their paychecks.  This was enough, under Illinois fraud law, to survive the employees’ motion to dismiss.  See FRCP 9(b); (*7).

Take-aways:

1/ While an employee owes an employer fiduciary duties of loyalty, his sub-par job performance doesn’t equate to a breach of fiduciary duty.  There must be self-dealing or intentional conduct by the employee for him to be vulnerable to an employer’s fiduciary duty suit;

2/ An employee misrepresenting hours work can underlie a common law fraud claim if the employer can show it paid in reliance on the truth of the employee’s hour reporting;

 

 

 

Cab Passenger Fares Aren’t “Wages” Under IL Wage Payment and Collection Act – 7th Circuit

The salient question considered by the Seventh Circuit in Enger v. Chicago Carriage Cab Corp., 2016 WL 106878 (7th Cir. 2016) was whether “wages” under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq. (the “Act”) encompasses “indirect wages” – monies paid an employee by third parties (i.e. as opposed to money paid directly from an employer).

The answer: No, it does not.

The plaintiffs, current and former Chicago cab drivers over a ten-year time frame sued various cab companies alleging Wage Act violations and unjust enrichment.

The plaintiffs alleged the companies violated the Act by misclassifying them as independent contractors instead of employees. The plaintiffs argued that the cab companies requirement that the driver plaintiffs pay daily or weekly shift fees (basically, a lease payment giving the drivers the right to operate the cabs) and other operating expenses, the companies violated the Act.

Affirming the district court’s motion to dismiss, the Seventh Circuit gave a cramped construction to the term wages under the Act examined the content and reach of the Act as applied to claims that

The Act gives employees a cause of action for payment of earned wages. “Wages” is defined by the Act as compensation owed an employee by an employer pursuant to an employment contract.

While the Seventh Circuit agreed with the drivers that there was at least an implied contract between them and the cab companies, those companies did not pay wages to the drivers as the term is defined by the Act.

This was because there was no obligation for the cab company to pay anything to the driver. The cab driver-cab company relationship was a reciprocal one: the driver paid a license fee to the company and then collected fares and tips from passengers.  No money was paid directly from the company to the driver.

The Court found that for the Act to apply to the drivers claims, it would have to expand the statutory definition of wages to include “indirect compensation:” compensation from someone other than the employer. Since there was no published case law on this issue, the Seventh Circuit refused to expand the Act’s definition of wages to include non-employer payments.

For support, the Court noted that Illinois’ Minimum Wage Law specifically defines wages to include gratuities in addition to compensation owed a plaintiff by reason of his employment. Since the legislature could have broadened the Act’s wages definition to include indirect compensation (like tips, etc.) but chose not to, the Court limited wages under the Act to payments directly from an employer to employee.

The Court also rejected the drivers’ argument that they received wages under the Act since drivers are often paid by the cab company when a passenger pays a fare via credit card. In this credit card scenario, the court found that the cab company simply acted as an intermediary that facilitated the credit card transaction. The company did not assume role of wage paying employer just because its credit card processor was used to handle some passenger credit card payments.

The driver’s unjust enrichment claim – that the cab companies were unjustly enriched by the drivers’ shift fees – also fell short.  Since there was an implied contract between the drivers and cab companies, unjust enrichment didn’t apply since an express or implied contract negates an unjust enrichment claim.

Afterwords:

This case clarifies that recoverable wages under Illinois’ Wage Act must flow directly from an employer to an employee.  Payments from third-party sources (like cab passengers) aren’t covered by the Wage Act.

Enger also serves as latest in a long line of cases that emphasize that an unjust enrichment can’t co-exist with an express or implied (as was the case here) contract governs the parties’ relationship.

 

Feelin’ Minnesota? Most Likely (Court Pierces Corporate Veil of Copyright Trolling Firm To Reach Lawyer’s Personal Assets)

After being widely lambasted for its heavy-handed and ethically ambiguous (challenged?) BitTorrent litigation tactics over the past few years, an incarnation of the infamous Prenda law firm was recently hit with a piercing the corporate veil judgment by a Minnesota state court.

In Guava, LLC v. Merkel, 2015 WL 4877851 (Minn. 2015), the plaintiff pornographic film producer, represented by the Alpha, LLC law firm (“Alpha”), filed a civil conspiracy suit and state wiretapping claim against various defendants whom plaintiff claimed illegally downloaded adult films owned by the plaintiff.

Alpha’s lone member is Minnesota attorney and Prenda alum Paul Hansmeier, who has garnered some negative press of his own both for his copyright trolling efforts and his more recent ADA violation suits against small businesses.  In October 2015, the Supreme Court of Minnesota instituted formal disciplinary proceedings against Hansmeier for various lawyer misconduct charges.

The Alpha firm’s litigation strategy in the Guava case followed the familiar script of issuing a subpoena blitz against some 300 internet service providers (ISPs) to learn the identity of the movie downloaders.  Many of the ISP customers fought back with motions to quash the subpoenas.

After assessing monetary sanctions against Alpha for bad faith conduct – trying to extract settlements from the ISP customers with no real intent to litigate – the trial court entered a money judgment against Alpha for the subpoena respondents and John Doe defendants.

Through post-judgment discovery, the subpoena defendants learned that Hansmeier had transferred over $150,000 from Alpha, defunding it in the process.

The judgment creditor defendants then moved to amend the judgment to add Hansmeier individually under a piercing the corporate veil theory. After the trial court granted the motion, Alpha and Hansmeier appealed.

Held: Affirmed

Rules/Reasoning:

In Minnesota, a district court has jurisdiction to take actions to enforce a judgment when the judgment is uncollectable and where refusing to amend a judgment would be inequitable.

A classic example of an equitable remedy that a court can apply to amend an unsatisfied money judgment is piercing the corporate veil. A Minnesota court will pierce the corporate veil where (1) a judgment debtor is the alter ego of another person or entity and (2) where there is fraud.

The alter ego analysis looks at a medley of factors including, among others, whether the judgment debtor was sufficiently capitalized, whether corporate formalities were followed, payment or nonpayment of dividends, and whether the dominant shareholder siphoned funds from an entity to avoid paying the entity’s debts.

The fraud piercing factor considers whether an individual has used the corporate form to gain an undeserved advantage. The party trying to pierce the corporate veil doesn’t have to show actual (read: intentional) fraud but must instead show the corporate entity operated as a constructive fraud on the judgment creditor.

Here, the defendants established both piercing prongs. The evidence clearly showed Alpha was used to further Hansmeier’s personal purposes, there was a disregard for basic corporate formalities and the firm was insufficiently and deliberately undercapitalized.

The court also found that it would be fundamentally unfair for Hansmeier to escape judgment here; noting that Hansmeier emptied Alpha’s bank accounts after it became clear that defendants were trying to enforce the money judgment against the Alpha firm.

Afterword:

While a Minnesota state court ruling won’t bind other jurisdictions, the case is post-worthy The case lesson is clear: if a court (at least in Minnesota) sees suspicious emptying of corporate assets when it’s about to enter a money judgment, it has equitable authority to modify a judgment so that it binds any individual who is siphoning the corporate assets.

The case is also significant because it breaks from states like Illinois that specify that piercing the corporate veil is not available in post-judgment proceedings. In Illinois and other states, a judgment creditor like the Guava defendants would have to file a separate lawsuit to pierce the corporate veil.  This obviously would entail spending time and money trying to attach assets that likely would be dissipated by case’s end.  The court here avoided what it viewed as an unfair result simply by amending the money judgment to add Hansmeier as a judgment debtor even though he was never a party to the lawsuit.

Implied-in-Law Contracts Versus Express Contracts: “Black Letter” Basics

Tsitiridis v. Mahmoud, 2015 IL App (1st) 141599-U pits a taxi medallion owner against a medallion manager in a breach of contract dispute.  Plaintiff pled both express and implied contract theories against the medallion manager based on an oral, year-to-year contract where the plaintiff licensed the medallions to the defendant (who used them in his fleet of cabs) for a monthly fee.  Under the agreement, the defendant also assumed responsibility for all its drivers’ traffic and parking violations and related fines.

When the defendant failed to pay its drivers’ traffic fines, plaintiff covered them by paying the city of Chicago about $60K.  Plaintiff then sued the defendant for reimbursement.

After the trial court dismissed the complaint on the defendant’s motion, the medallion owner plaintiff appealed.

The First District partially agreed and disagreed with the trial court. In doing so, it highlighted the chief differences between express and implied-in-law contracts and the importance of a plaintiff differentiating between the two theories in its Complaint.

A valid contract in Illinois requires an offer, acceptance and consideration (a reciprocal promise or some exchange of value between the parties).

While the medallion contract involved in this case seemed factually unorthodox since it was a verbal, year-to-year contract, the plaintiff alleged that in the cab business, it was an “industry standard” agreement.  Plaintiff alleged that the agreement was a classic quid pro quo: plaintiff licensed the medallions to the defendant who then used the medallions in its fleet of cabs in exchange for a monthly fee to the plaintiff.

Despite the lack of a written agreement, the court noted that in some cases, “industry standards” can explain facially incomplete contracts and save an agreement that would normally be dismissed by a court as indefinite.

The plaintiff’s complaint allegations that the oral medallion contract was standard in the taxicab industry was enough to allege a colorable breach of express contract claim. As a result, the trial court’s dismissal of the breach of oral contract Complaint count was reversed.

The court did affirm dismissal of the implied contract claims, though.   It voiced the differences between implied-in-law and implied-in-fact contracts.

An implied-in-law contract or quasi-contract arises by implication and does not depend on an actual agreement.   It is based on equitable concerns that no one should be able to unjustly enrich himself at another’s expense.

Implied-in-fact contracts, by contrast, are express contracts.  The court looks to the parties’ conduct (instead of the contract’s language) and whether the conduct is congruent with a mutual meeting of the minds concerning the pled contract terms.  If there is a match between alleged contract terms and the acts of the parties, the court will find an implied-in-fact contract exists.

Illinois law is also clear that an implied-in-law contract cannot co-exist with an express contract claim.  They are mutually exclusive.  While Illinois does allow a plaintiff to plead conflicting claims in the alternative, a plaintiff cannot allege a breach of express contract claim and an implied-in-law contract one in the same complaint.

Since the plaintiff here incorporated the same breach of express contract allegations into his implied-in-law contract count, the two counts were facially conflicting and the implied-in-law count had to be dismissed.

Take-away:

Like quantum meruit and unjust enrichment, Implied-in-law contract can serve as a viable fallback theory if there is some factual defect in a breach of express contract action.

However, while Illinois law allows alternative pleading, plaintiffs should take pains to make sure they don’t incorporate their implied contract facts into their express contract ones. If they do, they risk dismissal.

This case also has value for its clarifying the rule that industry standards can sometimes inform a contract’s meaning and supply the necessary “gap fillers” to sustain an otherwise too indefinite breach of contract complaint count.

“I Just Work Here”: Service on Corporate “Employee” Not The Same As Service On Corporate “Agent” – IL Court

Route 31, LLC, v. Collision Centers of America, 2015 IL App (2d) 150344-U examines the law and facts that determine whether service of process on a corporation complies with Illinois law.

The plaintiff served its lawsuit on the defendant’s office manager and eventually won a default judgment.  About nine months later, the corporation moved to quash service and vacate the default judgment on the basis that service was defective.  The trial court denied the motion and the defendant appealed.

The corporate defendant argued that the court had no personal jurisdiction over it since the plaintiff improperly served the lawsuit. A judgment entered without personal jurisdiction can be challenged at any time.

  • Personal jurisdiction may be established either by service of process in accordance with statutory requirements or by a party’s voluntary submission to the court’s jurisdiction.
  • Strict compliance with the statutes governing the service of process is required before a court will acquire personal jurisdiction over the person served.
  • Where service of process is not obtained in accordance with the requirements of the statute authorizing service of process, it is invalid, no personal jurisdiction is acquired, and any default judgment rendered against a defendant is void.
  • Section 2–204 of the Code provides that a private corporation may be served by leaving a copy of the process with its registered agent or any officer or “agent” of the corporation found anywhere in the state or in any other manner permitted by law. 735 ILCS 5/2–204 (West 2012).
  • Substitute service of a corporation may be made by serving the Secretary of State. 805 ILCS 5/5.25(b)
  • A sheriff’s return of service is prima facie evidence of service, which can be set aside only by clear and satisfactory evidence.
  • However, when a corporation is sued, the sheriff’s return as to the fact of agency is not conclusive. Id.

(¶¶ 13-14)

Employee vs. Agent: “What’s the Difference?”

Employee status and agency are often used interchangeably in common parlance but the terms differ in the service of process context.  An employee is not always an “agent.”   Illinois cases have invalidated service of process on corporations where a plaintiff, in different cases, served a cashier and receptionist with process and neither understood what it was.

But at least one court (Megan v. L.B. Foster Co., 1 Ill.App.3d 1036, 1038 (1971), did find that “service upon an intelligent clerk of a company who acts as a receptionist and who understood the purport of the service of summons” was sufficient service on a corporate employee.

In Collision Centers, the plaintiff and defendant submitted warring affidavits.  The plaintiff’s process server testified that the summons recipient held herself out as the “office manager,” and acknowledged that she was authorized to accept service.  The office manager’s affidavit said just the opposite: she claimed to have no corporate responsibilities or authority to receive legal papers for her employer.

The court noted that under the process server’s affidavit, the office manager was akin to an agent – an “intelligent” company representative who appreciates the importance of the served summons.

Yet the defendant’s office manager swore she was only a garden-variety “employee” who lacked any corporate authority to accept service and lacked a basic understanding of the papers’ meaning.  In fact, the office manager stated in the affidavit that she was badgered into accepting the papers by the plaintiff’s process server.

The widely divergent affidavit testimony meant the court could only decide the service issue after an evidentiary hearing with live testimony.  Since plaintiff has the burden of proving proper corporate service and never requested an evidentiary hearing in the trial court, the trial court erred in denying defendant’s petition to quash service without first conducting a hearing.  As a result, the judgment against the corporation was reversed.

Afterwords:

This case highlights the importance of a civil suit plaintiff’s vigilance when serving a corporation.  If service on a registered agent of a corporation (something that is typically public record via a Secretary of State website) isn’t possible, the plaintiff should take pains to serve an officer of the corporation or at least a knowledgeable agent.  Unfortunately, in Illinois at least, this isn’t always possible on the first try since service must usually go through the County Sheriff in the first instance.

No Course of Dealing In Trucking Dispute – Attorneys’ Fees Language in Invoice Not Binding On Transport Co. (IL ND)

C&K Trucking, LLC v. AGL, LLC, 2015 WL 6756282, features a narcotic fact pattern and this legal issue: Can boilerplate “legalese” in an invoice create binding contract rights against the invoice recipient?

Whether the mere mention of this topic is sleep inducing will depend on the person.  But what I can say is that the question is a pertinent one from a commercial litigation standpoint since it continues to crop up pretty regularly in practice.

I’ve represented parties trying to enforce favorable invoice language while at other times, defended against one-sided invoice terms.  The main issue there, like in today’s featured case, is whether there was a meeting of the minds on the disputed invoice language.

The plaintiff transportation broker in C&K Trucking sued to recover damages for unpaid cargo brokerage services. The broker’s damages action was based on invoices that provided it could recover unpaid amounts in addition to interest and attorneys’ fees.

The problem was that the broker didn’t send its invoices until after it performed under a series of oral contracts with the trucking firm defendants.

The contracting chronology went like this: plaintiff broker verbally hired the defendant to transport cargo for the plaintiff’s clients.  Once the defendants delivered the cargo and was paid by the broker’s clients, the broker sent the defendants invoices that contained the disputed fee-shifting terms.

Defendants moved for summary judgment that the invoice attorneys’ fees provision weren’t enforceable since they (defendants) never agreed to fee-shifting at the outset.  The Northern District agreed and granted defendants’ summary judgment motion.  In doing so, the court relied on some fundamental contract formation principles and reiterated the quantum of evidence needed to survive a summary judgment motion.

In Federal court, the summary judgment movant must show the court that a trial is pointless – that there’s no disputed issue of fact. Once the movant meets this burden, the non-moving party must then show that the affidavits, depositions and admissions on file do in fact show there are “material” disputed facts that should be resolved at trial.

A disputed fact is material where it might affect the outcome of the suit. But a metaphysical doubt isn’t enough. If the evidence doesn’t show a true factual dispute, a summary judgment will be granted.

To establish the formation of a valid contract in Illinois, the plaintiff must prove there was an offer, an acceptance and valuable consideration.  The plaintiff must also establish that the contract’s main terms were definite and certain.

Any one-sided attempt to change terms of a contract by sending an invoice with additional terms that were never discussed by the parties will normally fail to create an enforceable contract. 

An exception to this applies where there is a course of dealing between the parties.  A course of dealing is defined as a continuous relationship between parties over time that, based on the parties’ conduct, reflects a mutual understanding of each party’s rights and duties concerning a particular transaction.  A course of dealing under contract law can inform or qualify written contract language.

In this case, the plaintiff argued that the defendants’ years-long pattern of accepting and paying plaintiff’s invoices established a course of dealing and evinced defendant’s implied acceptance of the invoice contents.  The court rejected this argument since there was no evidence that defendants ever paid the plaintiff’s attorneys’ fees through the life of the verbal contracts.  The court also pointed to the fact that defendants disputed many of plaintiff’s invoices as additional proof that there was no tacit acknowledgement by defendants that it was responsible for plaintiff’s attorneys’ fees.

Afterwords:

The key lesson from the factually unsexy C&K Trucking case is that boilerplate fee-shifting invoice terms sent after the contract is performed generally aren’t enforceable. There must be a meeting of the minds at the contract formation stage to allow fee-shifting.

A course of dealing based on the parties’ past conduct can sometimes serve as a proxy for explicit contract terms or a party’s acceptance of those terms.  However, where the parties’ prior transactions do not clearly show mutual assent to disputed language, the breach of contract plaintiff cannot rely on the course of dealing rule to prove a defendant’s implied acceptance.

 

 

 

Hotel Titan Escapes Multi-Million Dollar Fla. Judgment Where No Joint Venture in Breach of Contract Case

In today’s featured case, the plaintiff construction firm contracted with a vacation resort operator in the Bahamas partly owned by a Marriott hotel subsidiary. When the resort  breached the contract, the plaintiff sued and won a $7.5M default judgment in a Bahamas court. When that judgment proved uncollectable, the plaintiff sued to enforce the judgment in Florida state court against Marriott – arguing it was responsible for the judgment since it was part of a joint venture that owned the resort company.  The jury ruled in favor of the plaintiff and against Marriott who then appealed.

Reversing the judgment, the Florida appeals court first noted that under Florida law, a joint venture is an association of persons or legal entities to carry out a single enterprise for profit.

In addition to proving the single enterprise for profit, the joint venture plaintiff must demonstrate (i) a community of interest in the performance of the common purpose, (ii) joint control or right to control the venture; (iii) a joint proprietary interest in the subject matter of the venture; (4) the right to share in the profits; and (5) a duty to share in any losses that may be sustained.

All elements must be established. If only one is absent, there’s no joint venture – even if the parties intended to form a joint venture from the outset.

The formation of a corporation almost always signals there is no joint venture. This is because joint ventures generally follow partnership law which follows a different set of rules than do corporations. So, by definition, corporate shareholders cannot be joint venturers by definition.

Otherwise, a plaintiff could “have it both ways” and claim that a given business entity was both a corporation and a joint venture. This would defeat the liability-limiting function of the corporate form.

A hallmark of joint control in a joint venture context is mutual agency: the ability of one joint venturer to bind another concerning the venture’s subject matter.  The reverse is also true: where one party cannot bind the other, there is no joint venture.

Here, none of the alleged joint venturers had legal authority to bind the others within the scope of the joint venture. The plaintiff failed to offer any evidence of joint control over either the subject of the venture or the other venturers’ conduct.

There was also no proof that one joint venture participant could bind the others. Since Marriott was only a minority shareholder in the resort enterprise, the court found it didn’t exercise enough control over the defaulted resort to subject it (Marriott) to liability for the resort’s breach of contract.

The court also ruled in Marriott’s favor on the plaintiff’s fraudulent inducement claim premised on Marriott’s failure to disclose the resort’s precarious economic status in order to  entice the plaintiff to contract with the resort.

Under Florida law, a fraud in the inducement claim predicated on a failure to disclose material information requires a plaintiff to prove a defendant had a duty to disclose information. A duty to disclose can be found (1) where there is a fiduciary duty among parties; or (2) where a party partially discloses certain facts such that he should have to divulge the rest of the related facts known to it.

Here, neither situation applied. Marriott owed no fiduciary duty to the plaintiff and didn’t transmit incomplete information to the plaintiff that could saddle the hotel chain with a duty to disclose.

Take-aways:

A big economic victory for Marriott. Clearly the plaintiff was trying to fasten liability to a deep-pocketed defendant several layers removed from the breaching party. The case shows how strictly some courts will scrutinize a joint venture claim. If there is no joint control or mutual agency, there is no joint venture. Period.

The case also solidifies business tort axiom that a fraudulent inducement by silence claim will only prevail if there is a duty to disclose – which almost always requires the finding of a fiduciary relationship. In situations like here, where there is a high-dollar contract between sophisticated commercial entities, it will usually be impossible to prove a fiduciary relationship.

Source: Marriott International, Inc. v. American Bridge Bahamas, Ltd., 2015 WL 8936529

 

Stipulation In Earlier Case Subjects LLC Member to Unjust Enrichment and Constructive Trust Judgment in Check Cashing Dispute – IL 1st Dist.

In a densely fact-packed case that contains an exhausting procedural history, the First District recently provided guidance on the chief elements of the equitable unjust enrichment and constructive trust remedies.

National Union v. DiMucci’s (2015 IL App (1st) 122725) back story centers around an anchor commercial tenant’s (Montgomery Ward) bankruptcy filing and its corporate landlord’s allowed claim for about $640K in defaulted lease payments.  In the bankruptcy case, the landlord assigned its approved claim by written stipulation to its lender whom it owed approximately $16M under a defaulted development loan.

The bankruptcy court paid $640K to the landlord who, instead of assigning it to the lender, pocketed the check.  The lender’s insurer then filed a state court action against the landlord’s officer (who deposited the funds in his personal account) to recover the $640K paid to the landlord in the Montgomery Ward bankruptcy.  After the trial court granted summary judgment for the plaintiff on its unjust enrichment and constructive trust counts, the defendant appealed.

Affirming the trial court’s judgment for the plaintiff, the First District first focused on the importance of the stipulation signed by the landlord in the prior bankruptcy case. The court rejected the landlord’s argument that his attorney in the bankruptcy case lacked authority to stipulate that the landlord would assign its $640K claim to the plaintiff’s insured (the lender). 

A stipulation is considered a judicial admission that cannot be contradicted by a party.  But it is only considered a judicial admission in the case in which it’s filed.  In a later case, the earlier stipulation is an evidentiary admission that can be explained away.

The law is also clear that a party is normally bound by his attorney’s entry into a stipulation on the party’s behalf. This holds true even where the attorney makes a mistake or is negligent.  Where an attorney lacks a client’s express authority, a client is still bound by his attorney’s conduct where the client fails to promptly seek relief from the stipulation. To undo a stipulation entered into by its attorney, a party must make a clear showing that the stipulated matter was untrue. Since the landlord failed to meet this elevated burden of invalidating the stipulation, the court held the landlord to the terms of the stipulation and ruled that it should have turned over the $640K to the plaintiff.

Unjust Enrichment and LLC Act

Next, the court examined the plaintiff’s unjust enrichment count. Unjust enrichment requires a plaintiff to show a defendant retained a benefit to plaintiff’s detriment and that the retention of the benefit violates basic principles of fairness. Where an unjust enrichment claim is based on a benefit being conferred on a defendant by an intermediary (here, the bankruptcy agent responsible for paying claims), the plaintiff must show (1) the benefit should have been given to the plaintiff but was mistakenly given to the defendant, (2) the defendant obtained the benefit from the third party via wrongful conduct, or (3) where plaintiff has a better claim to the benefit than does the defendant. (¶ 67)

Scenario (1) – benefit mistakenly given to defendant – clearly applied here. The bankruptcy court agent paid the landlord’s agent by mistake when the payment should have gone to the plaintiff pursuant to the stipulation.

The court also rejected defendant’s claim that he wasn’t liable under the Illinois LLC Act which immunizes LLC members from company obligations.  805 ILCS 180/10-10.  However, since plaintiff sued the defendant in his individual capacity for his own wrongful conduct (depositing a check in his personal account), the LLC Act didn’t protect the defendant from unjust enrichment liability.

Constructive Trust

The First District then affirmed the trial court’s imposition of a constructive trust on the $640K check.  A constructive trust is an equitable remedy applied to correct unjust enrichment. A constructive trust is generally created where there is fraudulent conduct by a defendant, a breach of fiduciary duty or when duress, coercion or mistake is present. While a defendant’s wrongful conduct is usually required for a court to impose a constructive trust, this isn’t always so. The key inquiry is whether it is unfair to allow a party to retain possession of property – regardless of whether the party has possession based on wrongful conduct or by mistake.

Here, the defendant failed to offer any evidence other than his own affidavit to dispute the fact that he wrongfully deposited funds that should have gone to the plaintiff; the court noting that under Supreme Court Rule 191, self-serving and conclusory affidavits aren’t enough to defeat summary judgment. (¶¶ 75-77)

Take-aways:

This case offers a useful synopsis of two fairly common equitable remedies – unjust enrichment and the constructive trust device – in a complex fact pattern involving multiple parties and diffuse legal proceedings.

The case makes clear that a party will be bound by his attorney’s conduct in signing a stipulation on the party’s behalf and that if a litigant wishes to nullify unauthorized attorney conduct, he carries a heavy burden of proof.

 

 

 

 

Joint Ventures, Close Corporations and Summary Judgment Motion Practice – IL Northern District Case Snapshot

The featured case is Apex Medical Research v. Arif (http://cases.justia.com/federal/district-courts/illinois/ilndce/1:2015cv02458/308072/52/0.pdf?ts=1447939471)

A medical clinical trials firm sued a doctor and his company for breach of contract and some tort claims when the firm learned the doctor was soliciting firm clients in violation of a noncompete signed by him.

In partially granting and denying a flurry of summary judgment motions, the Illinois Northern District highlights the importance of Local Rule 56 statements and responses in summary judgment practice. Substantively, the court provides detailed discussion of the key factors governing whether a business arrangement is a joint venture and what obligations flow from such a finding.

The clinical trials agreement contemplated that plaintiff would locate medical trial opportunities and then provide them to the doctor defendant.  The doctor would then conduct the trials in exchange for a percentage of the revenue generated by them.  The plaintiff sued when the parties’ relationship soured.

Procedurally, the court emphasized the key rules governing Local Rule 56 (“LR 56”) statements and responses in summary judgment practice:

– LR 56 is designed to aid the trial court in determining whether a trial is necessary; Its purpose is to identify relevant admissible evidence supporting the material facts.  LR 56 is not a vehicle for factual or legal arguments;

– LR 56 requires the moving party to provide a statement of material facts as to which the moving party contends there is no genuine issue;

– The non-moving party must then file a response to each numbered paragraph of the movant’s statement of facts and if it disagrees with any statement of fact, the non-movant must make specific reference to the affidavits and case record that supports the denial;

– A failure to cite to the record in support of a factual denial may be disregarded by the court;

– The non-movant may also submit its own statement of additional facts that require denial of the summary judgment motion;

– Where a non-movant makes evasive denials or claims insufficient knowledge to answer a moving party’s factual statement, the court will deem the fact admitted.

(**2-3)

The court focused its substantive legal analysis on whether the individual defendant owed fiduciary duties to the plaintiff.  Under Illinois law, a joint venturer owes fiduciary duties of loyalty and good faith to his other joint venturer.  So too does a shareholder in a close corporation (a corporation where stock is held in the hands of only a few people or family members) – but only if that shareholder is able to influence corporate policy and management.

The hallmarks of an Illinois joint venture are: (1) an express or implied association of two or more persons to carry out a single enterprise for profit; (2) a manifested intent by the parties to be joint venturers; (3) a community of interest (i.e. joint contribution of property, money, effort, skill or knowledge); and (4) a measure of joint control and management of the enterprise.  (*16).

The most important joint venture element is the joint control (item (4)) aspect.  Here, there were provisions of the parties’ written contract that reflected equal control and management of the clinical trials arrangement but other contract terms reflected the opposite – that the plaintiff could supervise the doctor defendant.  These conflicts in the evidence showed there was a genuine factual dispute on whether the parties jointly controlled and managed the trial venture.

The evidence was also murky as to whether the doctor defendant had enough control over the corporate plaintiff to subject the doctor to fiduciary obligations as a close corporation shareholder.  The conflicting evidence led the court to deny summary judgment on the plaintiffs’ breach of fiduciary duty claim. (**16-17).

Afterwords:

Procedurally, the case presents a thorough summary of the key rules governing summary judgment practice in Illinois Federal courts.  The party opposing summary judgment must explicitly cite to the case record for its denial of a given stated fact to be recognized by the court.

The case also provides useful substantive law discussion of the key factors governing the existence of a joint venture and whether a close corporation’s shareholder owes fiduciary duties to the other stockholders of that corporation.

 

Rights of First Refusal: Bankruptcy “Infotapes” Titan Wins Michigan Avenue Penthouse Dispute – IL 1st Dist.

IMG_0593

In today’s installment of High Class Problems, I feature Peter Francis Geraci, the Chicago bankruptcy lawyer whose pervasive television presence is doubtlessly familiar to weekday afternoon viewers.  Geraci and his wife recently won their real estate dispute with a company controlled by a foreign investor over rights to a 40th floor penthouse (“Penthouse”) in Chicago’s tony Michigan Avenue (“Magnificent Mile”) shopping district.

Reversing the trial court – who sided with the investor plaintiff- the First District appeals court in First 38, LLC v. NM Project Company, LLC, 2015 IL App (1st) 142680-U, expands on some recurring contract interpretation principles as applied to a high-dollar real estate dispute.

The plaintiff, a company associated with Mexican mining impresario and billionaire German Larrea, held a right of first refusal (“ROFR”) that required the Penthouse seller defendant to notify the plaintiff of any bona fide offer to buy the Penthouse that was accepted by the owner.  The owner was required to provide a copy of the signed offer (with certain identifying information blacked out) to the plaintiff who then had one (1) business day to match the offer.

When the owner sent the offer with the Geracis’ information redacted and failed to provide a copy of the earnest money check (a cool $860K, approx.), the plaintiff sued to block the sale of the Penthouse to the Geracis claiming the owner failed to adhere to the terms of the ROFR.  The Geracis eventually counter-sued for injunctive relief and specific performance and asked the court to require the owner to sell the Penthouse to them.

After a bench trial, the court ruled in plaintiff’s favor and the Geracis appealed.

Reversing, the First District discussed the operative contract law principles that framed the parties’ dispute.

– A right of first refusal is a restraint on alienation and is strictly construed against the holder;

– An Illinois court’s primary goal in interpreting a contract is to give effect to the parties’ intent by imputing the plain and ordinary meaning to the contract terms;

– A contract will not be deemed ambiguous just because the parties disagree on its meaning; instead, ambiguity requires words that are reasonably susceptible to more than one meaning;

– When a contract contains an ambiguity, a court may consider evidence of the parties intent (“your honor, this is what we meant….”);

– An “offer” in the context of contract law is a “manifestation of willingness to enter into a bargain made in such a way that another person’s assent to that bargain is invited and will conclude it’;

– An offer must be definite as to its material terms such that the parties are reasonably certain as to what the offer entails;

– A court cannot alter, change or modify terms of a contract or add new ones that the parties didn’t agree to and there is a presumption against provisions that could have easily been included in a contract;

– A bona fide offer is one where the purchaser can command the funds necessary to accept an offer.
(¶¶ 47-48, 51-52, 63)

Here, the court found the ROFR’s plain text unambiguous.  It provided that upon defendant notifying the plaintiff of an accepted and bona fide offer, the plaintiff’s ROFR obligations were triggered. (Plaintiff had one day to match the accepted offer.)  By its clear terms, the ROFR did not require the owner defendant to divulge the third-party buyer’s identity nor did it require proof of the third-party’s earnest money deposit.

According to the court, had the parties wished to require more offer specifics, they could have easily done so.  (¶ 54).  As a result, the First District reversed the trial court and held that the owner defendant complied with its ROFR notice requirements.  Since plaintiff failed to match the Geracis’ offer for the Penthouse within one business day of notice, it relinquished its rights to match the offer.

Take-aways:

For such expensive and unique subject matter, the main legal rules relied on by the court are simple.  The court applies basic contract formation and interpretation rules to decipher the ROFR and determine whether the parties adhered to their respective obligations under it.

From a drafting standpoint, the case cautions sophisticated commercial entities to take pains to spell out key contract terms as specifically as possible to avoid future disputes over what the contract says and means.

Illinois Real Estate Broker Gets Commission Money Judgment Where She Offers Ready, Willing and Able Home Buyer to Owner – IL 2d Dist.

A home seller’s self-styled ‘sarcastic’ emails and change of heart about whether to sell her home wasn’t enough to escape her obligation to pay her real estate broker’s commission, the Illinois Second District recently ruled.

In Clann Dilis, Ltd. v. Kilroy, 2015 IL App (2d) 15-0421-U, an unpublished case, the plaintiff broker and homeowner defendant signed an exclusive listing agreement to sell the defendant’s home that she co-owned with her ex-husband.  The defendant’s divorce case with her ex was pending at the time the parties’ signed the listing agreement.

After some back and forth concerning the sales price, the broker ultimately found a buyer for the home willing to pay what was in the defendant’s price range.  When the defendant rejected the offer, deciding instead to keep the home, the broker sued to recover her contractual commission – 6% of the sale price to the buyer.

After a bench trial, the circuit court entered a money judgment for the plaintiff of about $13K.  The homeowner defendant appealed on the basis that the prospective buyer lacked financial ability to consummate the home purchase.

Held: affirmed

Q: Why?

A: The proposed buyer located by the plaintiff offered $209,000 for the defendant’s home.  This price was within the range previously authorized by the defendant in emails to the broker.  E-mail evidence at trial showed the plaintiff willing to go as low as $199,000 in marketing the property.  The defendant’s husband moved in the divorce case to compel the defendant to accept the offer and the divorce court granted the motion.  Still, the defendant refused to sell; opting instead to buy out her ex-husband’s interest in the property.

Plaintiff then sued the defendant for breach of contract claiming she procured a suitable buyer for the property at a price assented to by the defendant.

Affirming the trial court’s judgment for plaintiff’s 6% commission, the Second District pronounced some key contract law principles that govern a real estate broker’s claim for a commission.

A breach of contract plaintiff must establish (1) the existence of a valid and enforceable contract, (2) performance by the plaintiff, (3) breach of contract by the defendant, and (4) damages resulting from the breach.  Whether a breach has occurred is a question of fact that is left to the trial court’s decision.  A court’s determination that a defendant breached a contract can’t be overturned unless the breach finding is unreasonable, arbitrary or not based on the evidence presented. (¶ 38.)

In the broker commission context, a broker earns her commission where she produces a ready, willing and able buyer.  A buyer is deemed ready, willing and able if he (1) has agreed to buy the property, and (2) has sufficient funds on hand or is able to secure the necessary funds within the time set by the contract.  A buyer lacks sufficient funds if he is depending on third parties to supply the funds and that third party isn’t legally bound to provide the funds to the buyer.

In addition, the sale to the would-be buyer doesn’t have to be consummated for the broker to be entitled to her commission.  As long as the broker introduces a buyer that is able to buy the property on terms specified in a listing agreement, the broker has a right to her commission.  (¶¶ 39, 49-50.)

Here, the trial court found that the buyer located by the plaintiff was a ready, willing and able one.  The court pointed out that the buyer signed a contract to buy the property for $209,000, the buyer had obtained a preapproval letter from a mortgage lender committing to the purchase funds, and the defendant authorized the plaintiff to sell the property for less than $209,000.  Taken together, these factors supported the trial court’s ruling that the broker furnished an acceptable buyer and was entitled to her commission.

Afterwords:

This case’s simple fact pattern provides a clear illustration of the procuring cause doctrine: so long as a real estate broker provides a ready, willing and able buyer, she can recover her commission; even if the sale falls through.

The case also showcases the factors a court looks at when determining whether a given real estate buyer is financially capable of consummating a purchase.

Finally, from the evidence lens, the Kilroy case highlights the importance of e-mail admissions from a party and how they can often make or break a litigant’s case at trial.

 

Trademark Infringement – The Irreparable Harm and Inadequate Remedy at Law Injunction Elements

The Northern District of Illinois recently pronounced the governing standards for injunctive relief in a franchise dispute between rival auto repair shops.

SBA-TLC, LLC v. Merlin Corp., 2015 WL 6955493 (N.D.Ill. 2015) sued its former franchisee for trademark infringement after the franchisee continued using the plaintiff’s signage, logo and design plans after the franchisor declared a default and terminated the franchise.

The court granted the plaintiff’s motion for a preliminary injunction based on the following black-letter basics:

To obtain injunctive relief, the moving party must show (1) he is likely to succeed on the merits, (2) the movant is likely to suffer irreparable harm if an injunction isn’t issued, (3) the balance of harms tips in the movant’s favor, and (4) an injunction is in the public interest.

To win a trademark infringement suit, the plaintiff must show (1) a protectable trademark, and (2) a likelihood of confusion as to the origin of the defendant’s product. In the injunction context, the trademark plaintiff merely has to show a “better than negligible chance of winning on the merits.

The plaintiff here introduced evidence that it properly registered its trademarks and that the defendant continued to use them after plaintiff declared a franchise agreement default. This satisfied the likelihood of success prong.

The court next found the plaintiff satisfied the irreparable harm and inadequate remedy at law injunction elements. Irreparable harm means harm that is not fully compensable (or avoidable) by a final judgment in the plaintiff’s favor.  To show an inadequate remedy at law, the plaintiff doesn’t have to prove that a remedy is entirely worthless.  Instead, the plaintiff needs to show that a money damage award is “seriously deficient.”

Trademark cases especially lend themselves to court findings of irreparable harm and an inadequate remedy at law since it is difficult to monetize the impact trademark infringement has on a given brand. Lost profits and loss of goodwill are factors that signal irreparable harm in trademark disputes. The court further found that since it’s difficult to accurately measure economic damages in trademark cases, an inadequate remedy at law could be presumed.

Finally, the court found that the balance of harms weighed in favor of an injunction. It found the potential harm to plaintiff if an injunction did not issue would be great since the defendant franchisee could continue to use plaintiff’s marks and financially harm the plaintiff. By contrast, harm to the franchisee defendant was relatively minimal since the franchisee could easily be compensated for any lost profits sustained during the period of the injunction.

Take-away:

SBA=TLC provides a succinct summary of governing injunction standards under FRCP 65. The case stands for proposition that the irreparable harm and inadequate remedy at law prongs of injunctive relief are presumed in the trademark infringement context given the intrinsic difficulties in quantifying infringement damages.

 

 

Homeowners’ Operation of Home-Based Daycare Business Doesn’t Violate Restrictive Covenant Requiring Residence Use – IL Third Dist.

The plaintiff homeowner’s association in Neufairfield Homeonwers Ass’n v. Wagner, 2015 IL App (3d) 140775, filed suit against two sets of homeowners claiming they violated restrictive covenants in the development’s declaration by operating daycare businesses from their homes.

The association based their suit on a declaration covenant that required all lots to be used for “Single Family Dwellings.”

The declaration allowed an exception for home-based businesses but only if they were operated in conformance with City ordinances and if there were no vehicles with business markings parked overnight in the development.  A further qualification to the home-based business rule prohibited activities that encouraged customers or members of the public to “frequent” the development.

The association sued when several homeowners complained that the daycare businesses resulted in increased vehicular traffic in the development and was a nuisance to the residents.

The association supported their case with an affidavit from the property manager and a homeowner – both of whom testified that the two daycares resulted in multiple non-residents entering and exiting the subdivision on a daily basis and that several residents had similar complaints.

Affirming summary judgment for the homeowner defendants, the appeals court provides a primer on the enforceability of restrictive covenants and the governing contract interpretation principles affecting them. It wrote:

-Restrictive covenants affecting land rights will be enforced according to their (the covenants) plain and unambiguous language;

–  In interpreting a restrictive covenant, the court’s objective is to give effect to the parties’ actual intent when the covenant was made;

– A condominium declaration is strong evidence of a developer’s intent and it will be construed against the developer where the declaration’s text is unclear;

– Undefined words in a declaration are given their “ordinary and commonly understood meanings” and a court will freely use a dictionary as a resource to decipher a word’s ordinary and popular meaning.

(¶¶ 16-20).

Here, the key declaration word was “frequent” – that is, did the defendants’ daycare businesses result in customers or members of the public “frequenting” the subdivision?

The declaration didn’t define the verb “frequent” but the dictionary did as to do something “habitually” or “persistently.”  Webster’s Third New International Dictionary 909 (1981); (¶ 20).

The plaintiff’s supporting affidavit established that, at most, 7 or 8 cars entered and exited the subdivision on a daily basis – supposedly to patronize the daycare businesses.  The court viewed this amount of traffic wasn’t persistent or habitual enough to meet the dictionary definition of “frequent” under the declaration.

As a result, the association’s declaratory judgment suit failed and the court affirmed summary judgment for the property owners.

Afterwords:

1/ Courts will construe declarations and restrictive covenants as written and will do so under standard contract interpretation rules (e.g. unambiguous language will be construed under plain language test and without resort to outside evidence).

2/ Where a term isn’t defined, a court can look to dictionary to inform a word’s ordinary and popular meaning.

3/ A court will construe a restrictive covenant in favor of free use of residential property and where a declaration specifically allows home-based businesses, a court will scrutinize association attempts to curtail a property owner’s use of his property.

 

 

Real Estate Not Subject To Conversion Claim – IL 2nd Dist.

The Illinois Second District recently reversed a trial court’s imposition of a constructive trust and assessment of punitive damages in a conversion case involving the transfer of real property.

In In re Estate of Yanni, 2015 IL App (2d) 150108, the Public Guardian filed suit on behalf of a disabled property owner (the “Ward”) for conversion and undue influence seeking to recover real estate – the Ward’s home – from the Ward’s son who deeded the home to himself without the Ward’s permission.

The trial court imposed a constructive trust on the property, awarded damages of $150K (the amount the Ward had contributed to the home through the years) and assessed punitive damages against the defendant for wrongful conduct. Defendant appealed.

Reversing, the appeals court held that the trial court should have granted the defendant’s Section 2-615 motion to dismiss since a claim for conversion, by definition, only applies to personal property (i.e. something moveable); not to real estate.

The court first addressed the procedural impact of the defendant answering the complaint after his prior motion to dismiss was denied. Normally, where a party answers a complaint after a court denies his motion to dismiss, he waives any defects in the complaint.

An exception to this rule is where the complaint altogether fails to state a recognized cause of action. If this is the case, the complaint can be attacked at any time and by any means. This is so because “a complaint that fails to state a [recognized] cause of action cannot support a judgment.”

However, this exception allowing complaint attacks at any time doesn’t apply to an incomplete or deficiently pled complaint – such as where a complaint alleges only bare conclusions instead of specific facts in a fraud claim. For a defendant to challenge a complaint after he answers it, the complaint must fail to state a recognized theory of recovery.

Here, the trial court erred because it allowed a judgment for the guardian on a conversion claim where the subject of the action was real property.  In Illinois, there is no recognized cause of action for conversion of real property. A conversion claim only applies to personal property.

Conversion is the wrongful and unauthorized deprivation of personal property from the person entitled to its immediate possession. The conversion plaintiff’s right to possess the property must be “absolute” and “unconditional” and he must make a demand for possession as a precondition to suing for conversion. (¶¶ 20-21)

The court rejected the guardian’s argument that the complaint alleged the defendant’s conversion of funds instead of physical realty.  The court noted that in the complaint, the guardian requested that the home be returned to the Ward’s estate and the Ward be given immediate possession of it.

The court also pointed to the fact that the defendant didn’t receive any funds or sales proceeds from the transfer that could be attached by a conversion claim. All that was alleged was that the defendant deeded the house to himself and his wife without the Ward’s permission. Since there were no liquid funds traceable to the defendant’s conduct, a conversion claim wasn’t a cognizable theory of recovery.

Afterwords:

This case provides some useful reminders about the nature of conversion and the proper timing to attack a complaint.

Conversion only applies to personal property. In an action involving real estate – unless there are specific funds that can be tied to a transfer of the property – conversion is not the right theory of recovery.

In hindsight, if in the plaintiff guardian’s shoes, I think I’d pursue a constructive trust based on equitable claims like a declaratory judgment (that the defendant’s deeding the home to himself is invalid), unjust enrichment and a partition action.

 

LLC That Pays Itself and Insiders to Exclusion of Creditor Plaintiff Violates Fraudulent Transfer Statute – Illinois Court

Applying Delaware corporate law, an Illinois appeals court in A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, reversed the dismissal of a contractor’s claim against a LLC and its sole member to enforce an out-of-state arbitration award.  In finding for the plaintiff contractor, the court considered some important and recurring questions concerning the level of protection LLCs provide a lone member and the reach of the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq. (“UFTA”), as it applies to commercial disputes.

The plaintiff sued  a Delaware LLC and its principal member, an Illinois LLC, to enforce a $450K Pennsylvania arbitration award against the Delaware LLC.  The plaintiff added UFTA and breach of fiduciary duty claims against the Delaware and Illinois LLCs based on pre-arbitration transfers made by the Delaware LLC of over $3M.

After a bench trial, the trial court ruled in favor of the LLC defendants and plaintiff appealed.

Reversing, the appeals court noted that the thrust of the UFTA claim was that the Delaware LLC enriched itself and its constituents when it wound down the company and paid itself and its member (the Illinois LLC) to the exclusion of plaintiff.

The UFTA was enacted to allow a creditor to defeat a debtor’s transfer of assets to which the creditor was entitled.  The UFTA has two separate schemes of liability: (1) actual fraud, a/k/a “fraud in fact” and (2) constructive fraud or “fraud in law” claims.  To prevail on an actual fraud claim, the plaintiff must prove a defendant’s intent to defraud, hinder or delay creditors.

By contrast, a constructive fraud UFTA claim doesn’t require proof of an intent to defraud.  Instead, the court looks to whether a transfer was made by a debtor for less than reasonably equivalent value leaving the debtor unable to pay any of its debts. (¶¶ 26-27); 740 ILCS 160/5(a)(1)(actual fraud), 160/5(a)(2)(constructive fraud).

When determining whether a debtor had an actual intent to defraud a creditor, a court considers up to eleven (11) “badges”of fraud which, in the aggregate, hone in on when a transfer was made, to whom, and what consideration flowed to the debtor in exchange for the transfer.

The court found that the Delaware LLC’s transfers of over $3M before the arbitration hearing had several attributes of actual fraud. Chief among them were that (i) the transfer was to an “insider” (i.e. a corporate officer and his relative), (ii) the Delaware LLC transferred assets without telling the plaintiff knowing that the plaintiff had a claim against it; (iii) the Delaware LLC received no consideration a $400K “management fee” paid to the Illinois LLC (the Delaware LLC’s sole member); and (iv) the Delaware LLC was insolvent after the  transfers.

Aside from reversing the UFTA judgment, the court also found the plaintiff should have won on its piercing the corporate veil and breach of fiduciary duty claims.  On the former, piercing claim, the court held that the evidence of fraudulent transfers by the Delaware LLC to the Illinois LLC presented a strong presumption of unjust circumstances that would merit piercing.  Under Delaware law (Delaware law governed since the defendant was based there), a court will pierce the corporate veil of limited liability where there is fraud or where a subsidiary is an alter ego of its corporate parent.  (¶ 41)

On the fiduciary duty count, the court held that once the Delaware LLC became insolvent, the Illinois LLC’s manager owed a fiduciary duty to creditors like the plaintiff to manage the Delaware LLC’s assets in the best interest of creditors. (¶¶ 45-46)

Afterwords:

A pro-creditor case in that it cements proposition that a UFTA plaintiff can prevail where he shows the convergence of several suspicious circumstances or “fraud badges” (i.e., transfer to insider, for little or no consideration, hiding the transfer from the creditor, etc.).  The case illustrates a court closely scrutinizing the timing and content of transfers that resulted in a company have no assets left to pay creditors.

Another important take-away lies in the court’s pronouncement that a corporate officer owes a fiduciary duty to corporate creditors upon the company’s dissolution.

Finally, the case shows the analytical overlap between UFTA claims and piercing claims.  It’s clear here at least, that where a plaintiff can show grounds for UFTA liability based on fraudulent transfers, this will also establish a basis to pierce the corporate veil.

 

Property Is Subject to Turnover Order Where Buyer Is ‘Continuation’ of Twice-Removed Seller – Successor Liability in IL

The Second District appeals court recently affirmed a trial court’s turnover order based on a finding that a property transfer involving three separate parties was in reality, a single “pre-arranged transfer” involving a “straw purchaser.”

I previously profiled Advocate Financial Group, LLC v. 5434 North Winthrop, 2015 IL App (2d) 150144 (see http://paulporvaznik.com/5485/5485) where the court addressed the “mere continuation” and fraud exceptions to the general rule of no successor liability (a successor corporation isn’t responsible for debts of predecessor) in a creditor’s post- judgment action against an entity twice removed from the judgment debtor.

The plaintiff obtained a breach of contract judgment against the developer defendant (Company 1) who transferred the building twice after the judgment date. The second building transfer was to a third-party (Company 3) who ostensibly had no relation to Company 1. The sale from Company 1 went through another entity – Company 2 – that was unrelated to Company 1.

Plaintiff alleged that Company 1 and Company 3 combined to thwart plaintiff’s collection efforts and sought the turnover of the building so plaintiff could sell it and use the proceeds to pay down the judgment. The trial court granted the turnover motion on the basis that Company 3 was the “continuation” of Company 1 in light of the common personnel between the companies.  The appeals court reversed though.  It found that further evidence was needed on the continuation exception but hinted that the fraud exception might apply instead to wipe out the Company 1-to Company 2- to Company 3 property transfer.

On remand, the trial court found that the fraud exception (successor can be liable for predecessor debts where they fraudulently collude to avoid predecessor’s debts) indeed applied and found the transfer of the building to Company 3 was a sham transfer and again ordered Company 3 to turn the building over to the plaintiff. Company 3 appealed.

Held: affirmed

Reasons:

– A corporation that purchases the assets of another corporation is generally not liable for the debts or liabilities of the transferor corporation. The rule’s purpose is to protect good faith purchasers from unassumed liability and seeks to foster the fluidity of corporate assets;

– The “fraudulent purpose” exception to the rule of no successor liability applies where a transaction is consummated for the fraudulent purpose of escaping liability for the seller’s obligations; 

– The mere continuation exception requires a showing that the successor entity “maintains the same or similar management and ownership, but merely wears different clothes.”  The test is not whether the seller’s business operation continues in the purchaser, but whether the seller’s corporate entity continues in the purchaser. 

– The key continuation question is always identity of ownership: does the “before” company and “after” company have the same officers, directors, and stockholders? 

The factual oddity here concerned Company 2 – the intermediary.  It was unclear whether Company 2 abetted Company 1 in its efforts to shake the plaintiff creditor.  The court affirmed the trial court’s factual finding that Company 2 was a straw purchaser from Company 1. The court focused on the abbreviated time span between the two transfers – Company 2 sold to Company 3 within days of buying the building from Company 1 – in finding that Company 2 was a straw purchaser. The court also pointed to evidence at trial that Company 1 was negotiating the ultimate transfer to Company 3 before the sale to Company 2 was even complete.

Taken together, the court agreed with the trial court that the two transfers (Company 1 to Company 2; Company 2 to Company 3) constituted an integrated, “pre-arranged” attempt to wipe out Company 1’s judgment debt to plaintiff.

Afterwords:  This case illustrates that a court will scrutinize property transfers that utilize middle-men that only hold the property for a short period of times (read: for only a few days).

Where successive property transfers occur within a compressed time window and the ultimate corporate buyer has substantial overlap (in terms of management personnel) with the first corporate seller, a court can void the transaction and deem it as part of a fraudulent effort to evade one of the first seller’s creditors.

 

Homeowner’s Piercing Claim Against Contractor Fails – Delaware Chancery Court

Since Delaware’s storied Chancery Court is widely regarded as the alpha and omega of corporate law venues, this opinion from Halloween eve of this year captured my attention.

The issues addressed in Doberstein v. G-P Industries, Inc. (http://courts.delaware.gov/opinions/download.aspx?ID=231700) concern the scope of the Chancery Court’s jurisdiction and the quantum of pleading specificity needed to state a piercing the corporate veil claim.

Plaintiff, who lived most of the year in Switzerland, sued the defendants for failing to timely construct renovations to her Delaware home.  All told, the plaintiff paid over $500K to the defendant for only about $300K worth of work (according to the plaintiff’s construction expert).  The plaintiff brought legal (fraud, breach of contract) and equitable claims (unjust enrichment, piercing the corporate veil, negligent misrepresentation (i.e. “equitable fraud”) against the corporate and individual defendants.

The Delaware court struck the equitable claims for failure to state a claim and dismissed the ancillary law claims for lack of subject matter jurisdiction.

The piercing claim failed because the plaintiff conflated (a) fraudulent conduct by the corporate defendant with (b) abuse of the corporate form by the corporation’s controlling shareholder.  The former is actionable under a fraud theory while the latter scenario gives rise to a piercing the corporate veil of limited liability claim.

 

A piercing plaintiff must do more than formulaically  allege that a corporation is the alter ego of another or of its main shareholder, though. He must instead plead facts that show a corporate shareholder abused the corporate form in order to defraud an innocent third party.

Here, since plaintiff’s piercing claims only alleged fraud by the defendants in connection with charging for construction work they didn’t do, there were no allegations that the corporate form was abused or that the individual defendant siphoned corporate funds.

The court also dismissed the plaintiff’s negligent misrepresentation count. Also called “equitable fraud”, a negligent misrepresentation claim under Delaware law generally requires the existence of a fiduciary relationship and the abuse of that relationship by one of the parties.

A contractual relationship between two sophisticated parties does not equate to a fiduciary one.  As a result, the court found that the plaintiff’s remedy lies in a breach of contract action at law (as opposed to an action in equity).

Finally, the court dismissed the plaintiff’s unjust   enrichment count since there was an express contract between the parties. An unjust enrichment claim cannot co-exist with a breach of express contract one.

The court then found that it lacked jurisdiction over the remaining law counts for breach of contract, fraud and fraudulent concealment.

The Delaware Chancery Court is a court of limited jurisdiction. It has jurisdiction only in three settings: (1) where a party seeks to invoke an equitable right; (2) where the plaintiff lacks an adequate remedy at law; and (3) where there is a statutory delegation of subject matter jurisdiction. The prototypical equitable claims are those involving fiduciary duties that arise in the context of trusts, estates and corporations.

Where a claim contains both legal and equitable features, the Chancery court does have discretion to resolve the legal portions of the controversy. However, where the equitable claims are dismissed and there is no basis for the court to assert jurisdiction over the remaining legal claims, the court lacks subject matter jurisdiction over the legal claims and they will be dismissed.

Here, once the plaintiff’s equitable claims (unjust enrichment, negligent misrepresentation) were disposed of, there was no “hook” for the court to retain jurisdiction over the legal claims.

Take-aways:

The case solidifies proposition that a plaintiff who seeks to pierce the corporate veil must show fraud in connection with an abuse of the corporate form. If the fraud relates to conduct by the corporation and not to a misuse of the corporate form (i.e. as an alter-ego or instrumentality of the key shareholder), the plaintiff’s remedy is an action at law against the corporation; not the individual corporate agent.

The case also provides a useful summary of what types of claims the Delaware Chancery Court will entertain and when it will handle legal claims that are filed in   conjunction with equitable ones.

 

 

LOI From Hell (?) – It’s Too Illusory For Car Dealership Manager to Enforce – IL 1st Dist.

A complicated Letter of Intent (LOI) involving parties to a planned car sales venture lies at the heart of Dicosola v. Ryan, 2015 IL App(1st) 150007, a case that addresses the level of consideration required to support a written contract in Illinois.

The plaintiff alleged that under the LOI, the defendant was to invest $1M with the plaintiff who would, along with her business partner, use those funds to establish and run the dealership.  In return for her investment, the defendant would get a 10% share of the business.  The LOI also called for the defendant to establish a 401(k) account for the benefit of the parties. 

Decried as a “drafting nightmare” by the court for its chaotic structure, the LOI was silent on the timing: it didn’t say when the dealership would open, how plaintiff would utilize defendant’s funds or even what the plaintiff’s and her partner’s roles were once the dealership went live.

When the defendant pulled out of the deal, the plaintiff sued for breach of contract and specific performance.  The trial court dismissed the complaint with prejudice and the plaintiff appealed.

Held: Dismissal affirmed

Reasons/Rules:

An LOI, like any other contract, must show offer, acceptance, consideration as well as definite and certain terms.

Consideration means a bargained-for exchange of promises or performances and can consist of a promise, an act or a forbearance. Consideration requires one party getting and the other giving something of value.  Otherwise, it’s an illusory promise.  A promise is illusory where the promisor isn’t really promising to do anything or where his promised performance is optional.

Contractual performance will deemed optional (and illusory) where there is no fixed time or duration for the contemplated services or where one parties obligations are terminable at will.

Here, the plaintiff’s promise was illusory since the LOI didn’t specify when she would perform general manager services for the inchoate dealership. Since the LOI lacked a specific start and end date, the Court held the LOI was too indefinite to be enforced.  The lack of clarity on the timing question led the court to conclude there was no consideration to support the plaintiff’s breach of contract claims. (¶¶ 18-20)

Afterwords:

1 – Parties should craft their business agreements with enough specifics for it to be enforced. By only providing aspirational language (“I will do this” or “I plan to do this”) with no specific timing requirements, a contracting party risks a contract being deemed illusory and unenforceable.

2 – Where one party to a contract’s obligations are to occur in the future, the contract language should provide an end date or duration for those services.

UCC Bars Bank Customer Suit Versus Bank For Estranged Husband’s Unauthorized Account Withdrawals

Kaplan v. JPMorgan Chase Bank, NA (2015 WL 2358240 (N.D.Ill. 2015)), starkly illustrates the challenges a bank customer faces when trying to pin liability on a bank that pays out on a fraudulent transaction involving the customer’s account.  There, the plaintiff bank customer sued JPMorgan Chase for breach of contract and negligence after the plaintiff’s estranged husband was able to siphon about $1M from two of plaintiff’s accounts over an 18-month period starting in 2009.  Plaintiff filed suit in 2014.

The plaintiff claimed the bank breached its contractual obligations and its duty of care by allowing the husband to forge plaintiff’s name on two account signature cards which enabled him to transfer the money from the accounts behind plaintiff’s back.

The Northern District granted summary judgment for the bank and in doing so, provides a good primer on a bank customer’s duties to monitor account statements and the reach of a bank’s liability for unauthorized withdrawals from a customer’s account.

Summary judgment Standards

To defeat summary judgment, a plaintiff must show there is a genuine disputed material fact that can only be resolved after a full trial on the merits

A disputed fact is “material” if it might affect the outcome of the case. A dispute is “genuine” where the evidence is such that a reasonable jury could return a verdict for the nonmoving party.

The moving party has the initial burden of showing that it is entitled to judgment as a matter of law and can make this showing by establishing that the other party has no evidence on an issue that it has the burden of proof.

Once the moving party meets this burden, the nonmovant must come forward with specific facts that demonstrate there is a genuine issue for trial and may not rely on conclusions, allegations or a “scintilla” (a trace or spark http://www.merriam-webster.com/dictionary/scintilla) of evidence to show that facts exist that will defeat summary judgment.

The Bank-Customer Contractual Relationship

The signature card defines the relationship between plaintiff and the bank defendant. A contract between a bank and its depositor is created by signature cards and a deposit agreement.

The signature card here incorporated Account Rules and Regulations (“Account Rules”) by reference.  These Rules, in turn, required the Plaintiff to notify the bank of any errors or unauthorized items within 30 days of the date on which the error or unauthorized item was made available to the plaintiff. If the plaintiff failed to do so within that 30-day window, the error or item would be enforceable against her.

The unauthorized transfers occurred over an 18 month time span starting in 2009 and ending in 2011. But the plaintiff didn’t notify the bank until nearly a year later in April 2012. As a result, the plaintiff missed the Account Rules’ 30-day time limit.

The UCC – Article 4

Plaintiff’s claims were also too late under the Uniform Commercial Code (UCC).  Section 4-406 of the UCC provides that where a bank makes a statement available to a customer, the customer must exercise “reasonable promptness” in notifying the bank of any errors. This section also immunizes a bank from liability where it pays in good faith on an unauthorized signature or alteration and the customer doesn’t notify the bank within a reasonable time, “not exceeding 30 days.” 4-406(c)-(d)

The UCC contains a one-year repose period, too. Section 4-406(f) provides that regardless of whether a bank exhibits a lack of care in paying an item, if a customer fails to notify the bank of an unauthorized signature or alteration within one year of a statement being made available, the customer’s claim is barred.

The court held that since the bank filed affidavits stating that plaintiff had free on-line access to her accounts on a monthly basis, the bank “made available” the account information under the UCC. The court held making account information available under 4-406(c) did not require a customer’s physical receipt of the statements.

Turning to whether the bank exhibited good faith in allowing the plaintiff’s husband to withdraw nearly $1M from the accounts, the court noted that good faith is defined by the UCC as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” UCC 3-103(a)(4). Since the plaintiff came forth with no evidence that the bank knew either that the signature cards were forged by the husband or that he lacked authority to add himself as an account signer, there was no showing that the bank lacked good faith.

UCC Article 3

Another UCC section that barred the plaintiff’s claims was 3-118(g). This section provides a 3 year limitations period for claims involving conversion of an instrument, breach of warranty or to enforce any other UCC rights not covered by another section.

The discovery rule – a judge-made rule that delays the start of a statute of limitations until an injured plaintiff knows or reasonably should know she has been injured – doesn’t apply to claims that fall within 3-118(g). This is because applying a discovery rule to an unauthorized monetary transaction would undermine the UCC’s stated goals of finality, predictability, uniformity and efficiency in commercial transactions.

Take-aways:

1/ A bank defendant has an arsenal of statutory defenses under the UCC to actions brought by customers;

2/ The UCC’s goals of fostering fluidity in commercial transactions trumps any opposing claims of individual customers;

3/  Harmed bank customers will at least have a chance to defraying her economic damages by vigilantly reviewing account statements and promptly notifying her bank within 30 days of any statement discrepancies.

Fired Lawyer Can Recover Pre-Firing Fees Under Quantum Meruit – No Evidentiary Hearing is Required – IL Appeals Court

 

The estate of a young woman killed in a car crash hired an attorney (Lawyer 1) to file a personal injury suit against the drivers involved in the crash. The estate representatives entered into a 1/3 contingent fee arrangement with the attorney who placed an attorney’s lien on any recovery by the estate.

About 2 years later, the estate fired Lawyer 1 and hired Lawyer 2.  Lawyer 2 eventually facilitated a settlement for the estate in the amount of $75,000 and filed a motion to adjudicate the Lawyer 1’s attorney lien.

Lawyer 1 claimed he was entitled to $25,000 – 1/3 of the settlement amount.   After considering his affidavit and time records, but without an evidentiary hearing, the trial court awarded Lawyer 1 a fraction (about $14K less) of what he sought on a quantum meruit basis (number of hours times hourly rate).

On appeal, Lawyer 1 argued the trial court denied him due process by not holding a formal hearing and erred by not awarding him more fees given the settlement’s proximity in time to his firing.

That’s the procedural backdrop to Dukovac v. Brieser Construction, 2015 IL App (3d) 14038-U, a recent unpublished Third District decision that addressed whether a fee petition requires an evidentiary hearing and the governing standards that guide a court’s analysis when assessing fees of discharged counsel.

The Third District upheld the trial court’s fee award and in doing so, relied on some well-settled fee award principles.

In Illinois, a client has the right to fire an attorney at any time. Once that happens, any contingency fee agreement signed by the client and attorney is no longer enforceable.

After he is discharged, an attorney’s recovery is limited to quantum meruit recovery for any services rendered before termination.

In situations where a case settles immediately after a lawyer is discharged, the lawyer can recover the full contract price.

In determining a reasonable fee under quantum meruit principles, the court considers several factors including (i) the time and labor required, (ii) the attorney’s skill and standing, (iii) the nature of the case, (iv) t he novelty and difficulty of the subject matter, (v) the attorney’s degree of responsibility in managing the case, (vi) the usual and customary charge for the type of work in the community where the lawyer practices, and (vii) the benefits flowing to the client.

A trial court adjudicating a lawyer’s lien can use its knowledge acquired in the discharge of its professional duties along with any evidence presented at the lien adjudication hearing.

Here, the appeals court that the trial court properly considered discharged Lawyer 1’s time records and affidavit in making its quantum meruit award. Even though there was no evidentiary hearing, the time sheets and affidavit gave the trial court enough to support its fee award.

Afterwords:

This case provides a good synopsis of the governing rules that apply where an attorney is discharged and the case soon after settles. A trial court has wide discretion in fashioning a fee award and doesn’t have to hold an evidentiary hearing with live witness testimony.

A clear case lesson is that a discharged petitioning attorney should be vigilant in submitting detailed time records so that the court has sufficient evidence to go on in making the fee award.

No Claim-Splitting or Res Judicata Issue Where Bank Refiles Breach of Note Claim After Prior DWP – From the Illinois Archives

BankFinancial, FSB v. Tandon, 2013 IL App (1st) 113152 serves as fairly recent reminder of the possible pitfalls that await a plaintiff who chooses to voluntarily dismiss or non-suit certain complaint counts when other counts of the complaint are involuntarily dismissed – such as by a motion to dismiss filed by a defendant.

The strategic reasons for taking a voluntary dismissal are several.  A non-suit can be a time-buying device when you get to trial and you realize you need more time to secure witnesses and strengthen your case.  Having some chronological breathing room to further develop your case can pay psychological and financial dividends for both client and lawyer.  But as BankFinancial amply illustrates, the right to voluntarily dismiss a claim and later refile it has limits.

In this breach of contract and mortgage foreclosure case, Plaintiff filed a three-count complaint for mortgage foreclosure, breach of contract (the promissory note) and breach of guaranty in 2003.

In 2006, Plaintiff voluntarily dismissed the foreclosure count and in 2008 the remaining claims were dismissed for want of prosecution (“DWP”).  A few month later, in January 2009, the plaintiff filed a new lawsuit, repleading its breach of note and breach of guaranty claims.

The trial court dismissed the 2009 case based on res judicata and plaintiff appealed.

Held: reversed.

Q: Why?

A: Res judicata’s central purpose is to preclude parties from contesting matters they had a full and fair opportunity to litigate.  To further this purpose, a final judgment on the merits is required to trigger res judicata’s application.  A “final judgment” is one that terminates the litigation between the parties on the merits.

A voluntary dismissal of a case or a DWP is, by definition, NOT a final judgment since when a case is DWPd, the court doesn’t reach the merits of a case. 

After a DWP, Code Section 13-217 allows party one year to refile an action within one year and the DWP order doesn’t become final until the one year refilling period expires. (¶¶ 29-30).

Illinois also disallows the related doctrine of claim splitting. Claim splitting applies where a plaintiff tries to refile a claim that he previously voluntarily dismissed in an earlier proceeding AFTER another count of the complaint in that prior action was involuntarily dismissed.

So, if in Case No. 1, a plaintiff’s negligence claim is (involuntarily) dismissed on a defendant’s motion and then plaintiff voluntarily non-suits his remaining breach of contract claim, the plaintiff cannot later file the breach of contract claim in a new action.  This will be deemed impermissible claim splitting because it subverts the law’s desire for finality and efficiency.

Applying these rules, the court held that the plaintiff could properly refile its breach of note and guaranty claims. The voluntary dismissal of the foreclosure count wasn’t a final judgment nor was the DWP of the note and guaranty counts.  The DWP order didn’t become final until a year elapsed from the DWP order date.  Since the plaintiff refiled its note and guaranty counts within a year of the DWP, the refiled action was timely.  As a result, the plaintiff’s refiled suit wasn’t barred by res judicata or the claim splitting rule.

Afterwords:

This case crystallizes the proposition that if a plaintiff non-suits a complaint count or gets a claim(s) DWPd, he can refile the dismissed claims within one year and avoid any dismissal motion based on res judicata.

If a plaintiff non-suits one claim after a different complaint claim is involuntarily dismissed, he will likely be barred from refilling the non-suited claim in a second action under res judicata and claim-splitting rules.  In such a setting, the plaintiff should either litigate the remaining count(s) (the count(s) that isn’t (aren’t) dismissed) to judgment or ask the court for a finding that he can immediately appeal the order dismissing the involuntarily dismissed claim.

Other References:

Hudson v. City of Chicago, 228 Ill.2d 462 (2008)

Rein v. Noyes & Co., 172 Ill.2d 325 (1996)

 

Exclusivity Provision in Lease Permits Landlord to Rent to ‘McD’s’ In NJ Shopping Mall (Much to ‘Sbux’s’ Chagrin)

Exclusivity provisions are staples of some commercial leases, particularly in the shopping mall setting.

The purpose of these so-called “exclusives” is to protect a tenant from a competing business renting in the same shopping center and potentially undercutting the tenant’s pricing. The larger the tenant (think “anchor” tenant) in terms of resources, the more leverage it has in insisting on an exclusivity term.

Delco, LLC v. Starbucks (see https://casetext.com/case/delco-llc-v-starbucks-corp) pits a New Jersey commercial landlord suing the coffee giant for a court declaration that the landlord’s renting to McDonald’s in the same shopping center did not violate an exclusive in Starbucks’ lease that prohibited plaintiff from leasing space to any tenant (other than Starbucks) who would sell “coffee, espresso and tea drinks.”  The one qualification to the exclusive was that the landlord could rent to “any tenant [who occupies] twenty thousand contiguous square feet or more…and operating under a single trade name.”

The appeals court affirmed the trial court’s finding that the landlord could lease 40,000 square feet to McDonald’s (which sells coffee) without violating the Starbucks lease exclusive.

Applying the plain language of the exclusivity term under basic New Jersey contract interpretation rules, the court found that McDonald’s easily qualified as a tenant who is “operating under a single trade name.”  And since the McDonald’s lease encompassed over 20,000 square feet, the McDonald’s lease qualified for the exclusivity exception.

Afterwords:

It’s not clear from the short opinion why Starbucks put up such a fight on what seems like an obvious exception to the exclusivity term. So vigorous were Starbucks litigation efforts here, that the plaintiff was awarded over $113K in lawyer fees litigating whether the McDonald’s lease ran afoul of the exclusive term in the Starbucks’ lease.

The appeals court reversed the fee award though since the trial judge didn’t delineate its specific findings that support its fee award. The case will now go back to the NJ trial court for further litigation of the plaintiff-landlord’s attorneys’ fees.

Process Server’s Return of Service Qualifies As Public Records and ‘Regularly Conducted Business Activity’ Hearsay Exceptions – Florida Appeals Court

My experience with the hearsay evidence rules usually involves trying to get a business record like an invoice or spreadsheet into evidence at trial or on summary judgment.  The business records hearsay exception is found at Illinois Evidence Rule 803(6) and mirrors the Federal counterpart.  “Exception” in the context of hearsay evidence means a document is hearsay (an out-of-court statement used to prove the truth of the matter asserted) and would normally be excluded but still gets in evidence because the document (or other piece of evidence) has an element of reliability that satisfies the court that the document is what it appears to be.

Occasionally though, I’ve found that a working knowledge of some of the more obscure (to me at least) hearsay exceptions can in some cases lead to a victory or at least resurrect a rapidly flagging case.

Davidian v. JP Morgan Chase Bank, NA, 2015 WL 5827124 (Fla. 4th DCA 2015) (http://www.4dca.org/opinions/Oct.%202015/10-7-15/4D14-2431.op.pdf) a recent Florida appeals court decision, examines some hearsay exceptions as they apply to a process server’s sworn return of service and the persons served are challenging service.

Chase Bank filed a foreclosure suit against defendants/appellants (a husband and wife) and filed returns of service signed by Chase’s process server who certified that he served both appellants at the same time on the same date. The appellants moved to quash service of process on the grounds they were never served. The trial court denied the motion leading to this appeal.

The appeals court affirmed.  It held the appellants failed to show by clear and convincing proof that the returns of service were deficient.

In Florida, the burden of proving proper service of process is on the suing party and the return of service is evidence of whether service was validly made.  A return of service is presumed to be valid and the party contesting service must overcome the presumption by clear and convincing evidence.  A return of service is technically hearsay since it’s an out-of-court statement used to show its truth – that service of summons was in fact made on a party.

Two hearsay rule exceptions recognized not only by Florida courts but various state and Federal courts include the public records and the “regularly conducted business activity” exceptions.  Fla. Stat. s. 90.801, 803(6), (8).

Here, the court found the service return admissible under both exceptions.  The return was a public record – presumably because it was filed as part of the case record.  The return also qualified as evidence of regularly conducted business activity since the process server stated in his affidavit that was his regular practice to prepare such an affidavit detailing the date, time and manner of service.

The appeals court also rejected appellants’ argument that the service returns were defeated by their counter-affidavits in which they denied receiving the summons and complaint.  When faced with a service return and a defendant claiming he/she wasn’t served, the court makes a credibility determination after an evidentiary hearing.   Factual determinations are typically not disturbed on appeal.  The court found that the trial court was in a better position to judge the credibility of the witnesses and upheld the motion to quash’s denial.

Take-aways:

This case presents application of hearsay exceptions in an unorthodox factual setting.  The court expanded the scope of the public records and regularly-conducted-business-activity exceptions to encompass a process server’s return of service.  This case and others  like it validate process servers’ sworn returns and make it easier for plaintiffs to clear service of process hurdles where a defendant claims to have never been served.

 

 

 

Wage Payment and Collection Act Amendments Allowing for Attorneys’ Fees and 2% Interest – One Applies Retroactively, the Other Doesn’t – IL 1st Dist

Aside from its application of the apparent agency doctrine to a dispute over commissions, Thomas v. Weatherguard Construction Company, 2015 IL App (1st) 142785 also provides an interesting analysis of when attorneys’ fees and statutory interest can be tacked on to a successful Illinois Wage Payment and Collection Act (“Wage Act”) plaintiff’s suit for unpaid wages against an employer.

The Wage Act was amended in 2011 to allow a winning plaintiff to add to his unpaid damage award (a) attorneys’ fees and costs, plus (b) 2% monthly interest on unpaid amounts. 820 ILCS 115/14(a).

Before this change, a Wage Act plaintiff could still recover fees but he had to do so under the Attorneys Fees in Wage Actions Act, 705 ILCS 225/1.  Since the plaintiff in this case filed suit in 2007 (before the amendment), the question was whether Section 14(a) (the section with the attorneys’ fees provision) applied retroactively.  The defendant argued that the amended Wage Act could not apply retroactively since it fastened two new liabilities – an attorneys’ fees provision and a 2% interest term – on Wage Act defendants.

Generally, procedural changes in a statute apply retroactively while substantive changes don’t.  But the line separating procedure from substance can be blurry.

‘Procedure is the machinery for carrying on the suit, including pleading, process, evidence and practice, whether in the trial court, or in the processes by which causes are carried to the appellate courts for review, or laying the foundation for such review.’ By contrast, a substantive change in the law establishes, creates or defines rights. (¶ 66)

A procedural statutory amendment will not be applied retroactively if the statute would have a “retroactive impact” – meaning the amended statute would (i) impair rights a party possessed when he acted, (ii) increase a party’s liability for past conduct, or (iii) impose new duties with respect to transactions already completed.

Here, the amended Section 14(a) of the Wage Act was not a substantive change since it did not create a new attorneys’ fees remedy.  At the time plaintiff filed suit (2007), a Wage Act plaintiff could recover fees under the Attorneys Fees in Wage Actions Act cited above. 

In addition, the amended law didn’t have retroactive effect on the defendant.  The amended statute didn’t impair any of the defendant’s pre-existing rights, increase the defendant’s liability for past conduct or impose new obligations on it.  Again, a prevailing Wage Act plaintiff could recover attorneys’ fees under the prior, existing version of statute when plaintiff filed suit. (¶¶ 66-74)

The court reached the opposite conclusion on the 2% monthly interest provision, though.  Where a statutory amendment creates a new liability that didn’t exist under a prior version of a law, it’s considered a  substantive change.  Since the 2% monthly interest provision didn’t exist in the earlier version of the Wage Act, its presence in the current statute was a substantive change that could not be applied retroactively.

The end result was that the court remanded the case so that the trial court could assess plaintiff’s attorneys’ fees incurred in his partially successful Wage Act claim.

Take-away:

This is a pro-claimant case as it gives added strength to a Wage Act remedy.  By raising the specter of prevailing plaintiff attorneys’ fees on top of the unpaid wages amount, the amended Wage Act may level the playing field between former employees who might normally lack the resources to fund litigation against deeper-pocketed ex-employers.  By allowing for fees and interest, the Wage Act provides an incentive for aggrieved employees to sue under the statute.

 

Apparent Agency Binds Roofing Company to Acts of Third-Party Marketing Firm; Liable Under Illinois Wage Act – IL Court

In Thomas v. Weatherguard Construction Company, 2015 IL App (1st) 142785, the First District provides a thorough analysis of Illinois agency law as it applies to breach of contract claims for unpaid commissions. The court also discusses the parameters of the Illinois Wage Payment and Collection Act (“Wage Act”) and the universe of damages available under it.

The Plaintiff sued to recover about $50K in commissions from a company that repairs weather-damaged homes for customers signed up by the plaintiff.

The arrangement involved plaintiff soliciting business for the defendant by targeting homeowners who suffered weather damage to their homes. Once the homeowner’s insurer approved the repair work, defendant would do the repairs and get paid by the homeowner’s insurer.  The defendant would then pay plaintiff a 20% commission based on the total repair contract price on all deals originated by the plaintiff.

At trial, the defendant argued that plaintiff wasn’t its employee.  It claimed the plaintiff was employed by a third-party marketing company whom defendant contracted with to solicit repair orders for the defendant.

The trial court entered a money judgment for the plaintiff for less than $10,000 and denied plaintiff’s claims for attorneys’ fees under the Wage Act.  Both sides appealed.

Affirming, the appeals court discussed agency law, the elements of an enforceable oral contract, and recoverable damages under the Wage Act.

Agency Law Analysis

Under the apparent agency rule, a principal (here, the defendant) is bound by the authority it appears to give an agent.   Once a principal creates an appearance of authority, he cannot later deny that authority to an innocent third party who relies on the appearance of authority.

The apparent agency claimant must show (1) the principal acted in a manner that would lead a reasonable person to believe the individual at fault was an employee or agent of the principal; (2) the principal had knowledge of or acquiesced in the agent’s acts; (3) the injured party (here, the plaintiff) acted in reliance on the principal’s conduct.  But, someone dealing with an agent has to exercise reasonable diligence and prudence in determining the reach of an agent’s authority.  (¶¶ 48-49, 51)

Here, there were multiple earmarks of authority flowing from the defendant to the marketing company who hired the plaintiff.  The marketing firm used the defendant’s uniforms, logo, business cards, and shared defendant’s office space and staff.  Viewing these factors holistically, the First District agreed with the trial court that it was reasonable for the plaintiff to assume the marketing firm was affiliated with defendant and was authorized to hire the plaintiff on defendant’s behalf.  (¶ 50)

Breach of Oral Contract

Rejecting the defendant’s claim that the plaintiff’s commission contract was too uncertain, the court found there was an enforceable oral contract even though certain price terms were unclear.  An oral contract’s existence and terms are questions of fact and a trial court’s determination that an oral contract does or doesn’t exist is entitled to deference by the appeals court.  In addition, damages are an essential element of a breach of contract claim the failure to prove damages spells defeat for the breach of contract plaintiff.

The Court agreed with the trial court that plaintiff sufficiently established an oral contract for defendant to pay plaintiff a 20% commission on the net proceeds (not gross) earned by the defendant on a given home repair job. (¶¶ 55-59)

The Wage Act

Part II of this post examines the court’s analysis of whether the Wage Act’s 2011 amendments that provide for attorneys’ fees and interest provisions apply retroactively (plaintiff filed suit in 2007).

Afterwords:

Agency law issues come up all the time in my practice.  In the breach of contract setting, the key question usually is whether an individual or entity has actual or apparent authority to act on behalf of a solvent or “deeper pocketed” defendant (usually a corporation or LLC).  Cases like Thomas show how risky it is for defendants to allow unrelated third parties to use a corporate defendant’s trade dress (logo, e.g.), facilities, staff or name on marketing materials.

A clear lesson from the case is that if a company does let an intermediary use the company’s brand and brand trappings, the company should at least have indemnification and hold-harmless agreements in place so the company has some recourse against the middleman if a plaintiff sues the company for the middleman’s conduct.

 

Fraudulent Concealment In Illinois – Podiatry School Might Be On Hook for Omissions in School Catalog

A podiatry school alum may have a viable fraudulent concealment claim against the school for failing to warn him of evaporating job prospects in the foot doctor field.

That’s the key take-away from the Second District’s recent opinion in Abazari v. Rosalind Franklin University of Medicine and Science, 2015 IL App (2d) 140952, a case that considers what lengths an educational institution must go to in disclosing job placement rates and whether it can be held liable for failing to provide accurate data.

The plaintiff alleged he enrolled in the defendant’s podiatry program based on written representations contained in school brochures as well as oral statements made by high-ranking school officials.  Plaintiff claimed that the school failed to mention in its course catalog that there were too many students for available residency openings.  He also alleged that a school admissions officer misrepresented the school’s graduates’ loan default rates.  Plaintiff claimed both statements played a pivotal role in inducing plaintiff to enroll in the school.

Plaintiff’s fraud, negligent misrepresentation and fraudulent concealment claims were all dismissed with prejudice by the trial court.  Plaintiff appealed.

Partially reversing the dismissal of the fraudulent concealment claim, the Court stated the governing Illinois fraud rules that attach to student suits against higher education providers. These include:

To claim fraudulent concealment, a plaintiff must show (1) defendant concealed a material fact under circumstances that created a duty to speak, (2) defendant intended to induce a false belief, (3) the plaintiff could not have discovered the truth through reasonable inquiry or inspection, or was prevented from making a reasonable inquiry, (4) plaintiff was justified in relying on defendant’s silence as a representation that a fact did not exist; (5) the concealed information was such that the plaintiff would have acted differently had he been aware of it; and (6) the plaintiff’s reliance resulted in damages.

Like a fraud claim, fraudulent concealment must involve an existing or past state of affairs; projections of future events will not support a fraud claim.  In addition, a party cannot fraudulently conceal something it doesn’t know.

A statement that is partially or “technically” true (a half-truth) can be fraudulent where it omits qualifying information – like the fact that successful completion of the podiatry program was no guarantee of a post-graduate residency. 

While a person may not enter into a transaction “with eyes closed” to available information, a failure to investigate is excused where his inquiries are impeded by someone creating a false sense of security as to a statement’s validity.

A duty to speak arises where the parties are in a fiduciary relationship or where one party occupies a position of superiority or influence over the other.  (¶¶ 27-30, 33, 37)

The Illinois Administrative Code played an important part in the court’s decision.  Under the Code, postsecondary institutions liked the defendant must accurately describe degree programs, tuition, fees, refund policies and “such other material facts concerning the institution and the program or course of instruction as are likely to affect the decision of the student to enroll.”  23 Ill. Adm. Code S. 1030.60(a)(7).

The Court held that since the school voluntarily mentioned how crucial it was for graduates to secure podiatric residency positions.  A shortage of residencies could be material to a prospective student’s enrollment decision.  As a result, the court found that plaintiff could possibly state a fraudulent concealment claim based on the school’s failure to disclose the existing shortfall in available residencies.  The court held that the plaintiff should be able to amend his fraudulent concealment claim to supply additional facts.  (¶¶ 37-38).

Afterwords:

The plaintiff’s claim is alive but it’s on life support.  The court did not decide that the plaintiff’s fraud claim had merit.  It instead found that the plaintiff could maybe make out a fraudulent concealment case if he can show the defendant college failed to disclose key jobs or residency data.

Still, this case should give pause not just to podiatric purveyors but to higher educational institutions across the board since it shows a court’s willingness to scrutinize the content of schools’ recruitment materials.  The case’s lesson is that if post-graduate job placement is a material concern (which it doubtlessly is), and if a school is able to keep student’s in the dark about future job prospects, then a student might have grounds for a fraud suit against his alma mater where it hides bleak post-graduate jobs stats from him.

Breach of Lease Doesn’t Negate Earlier Exercise of Option to Purchase Property – Illinois Court

A dispute over the purchase price of a veterinary practice boiled over into multi-year litigation after the plaintiff in Ruffolo v. Jordan, 2015 IL App (1st) 140969 leased the defendant’s practice under a multi-year lease with an option to buy.

The plaintiff exercised the purchase option in August 2005 and paid rent for 18 months until finally stopping in March 2007 when it became clear the parties wouldn’t resolve the purchase price issue.

The plaintiff sued for specific performance and the trial court granted summary judgment for her, ordering defendant to sell the property for $525,000 – a figure midway between the parties’ respective appraisals. Defendant appealed.

Affirming summary judgment, the First District examined the interplay between parties rights and duties under a lease that contains an option to purchase the property.

The lease gave plaintiff an option to buy the property at a price to be determined by the parties’ handpicked appraiser. Eventually, the parties’ appraisers selected a third party to appraise the property.  When the defendant refused to sell at the third-party appraiser’s $525,000 figure, plaintiff sued to enforce the purchase option.

In Illinois, the goal of contract interpretation is the intent of the parties and a contract must be interpreted as a whole and ascribed its terms’ plain and ordinary meaning. ¶ 10

A party is entitled to specific performance of a contract for real estate where it establishes that it was ready, willing and able to perform under a contract but was prevented from doing so by the other party.

When a lease contains an option to purchase, it becomes a present contract for the sale of the property. Once the option holder exercise the option, the relationship of landlord-tenant morphs into one of vendor-vendee (seller-buyer).  A contract for the sale of land cannot be enforced until all essential terms are established, including sale price. (¶ 14).

Here, the parties’ landlord-tenant relationship didn’t end until the sale price was mutually agreed upon. As a result, the parties’ had a concurrent landlord-tenant relationship vis a vis the lease and a vendor-vendee one concerning the purchase option.

In finding for the plaintiff, the court rejected seller defendant’s argument that plaintiff breached the lease by not paying rent for several months. Defendant claimed that the plaintiffs’ failure to pay rent from March – October 2007 nullified the purchase option exercised by plaintiffs in August 2005.

The court held that since the plaintiff was in compliance with the lease when she exercised the option (August 2005), she could enforce the purchase contract.  The court explained that once the plaintiffs’ right to purchase the property vested, her corresponding right to buy the property no longer depended on her adhering to the lease terms. The lease became severable (separate) from the purchase option once plaintiff exercised the option. (¶¶ 19-20).

The one consolation for the defendant was that the court found it was entitled to a credit of seven months of unpaid rent towards the purchase price.  This figure will be calculated on remand.

Take-aways:

1/ A lease with an option to buy creates two distinct agreements once the option is exercised;

2/ The timely exercise of an option can’t be negated by a later lease breach;

3/ A definite price term in a real estate contract is a necessary precondition for a successful specific performance suit.

 

Statute of Frauds Defeats Seller’s Countersuit for Damages After Property Sale Falls Through (IL 2d Dist.)

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When a deal to sell two industrial buildings collapsed, the would-be buyer sued to recover his $10K earnest money deposit. The seller, thinking the buyer was to blame for the aborted contract, countersued for $300K – the difference between the sale price plaintiff was supposed to pay and for what the seller ultimately sold the buildings to another buyer

Affirming dismissal of the seller’s counterclaim, the appeals court in Pease v. McPike, 2015 IL App (2d) 140881-U examines the contours of the Statute of Frauds (“SOF”) as it applies to commercial real estate transactions.

The plaintiff buyer never signed the contract that the sellers were trying to enforce.  Instead, the buyer signed a cancellation notice that post-dated the failed contract.  The seller argued that the buyer’s signature on the cancellation notice coupled with the allegations in his complaint were enough to satisfy the writing requirement (and that the buyer “signed” the earlier contract) of the SOF.

An Illinois real estate contract cannot be enforced under the SOF unless (1) there is a written memorandum or note on one or more documents; (2) the documents (if there are more than one) collectively contain a description of the property and terms of sale, including price and manner of payment, and (3) the memorandum or note is signed by the party to be charged (here, the plaintiff buyer). 

To satisfy the SOF, the writing itself doesn’t have to be a contract; it just has to be evidence that one (a contract) exists.  The writing doesn’t have to consist of a single page, but the writing signed by the party being sued must contain the essential terms of the contract and, where several writings exist, they must refer to one another or otherwise show a connection between them.  In a case of multiple writings, not all of them have to be signed. However, the writings that are signed must have a connection to the contract.  (¶ 41). 

A written cancellation of a contract can sometimes satisfy the SOF writing requirement and demonstrate to a court that a written contract does in fact exist.  However, the cancellation notice must explicitly refer to the contract and delineate the contract’s key terms. (¶ 48).

Here, there were two contracts – the initial purchase contract (which plaintiff did not sign) and the second “replacement contract” (which plaintiff did sign).  The Court found that the cancellation notice (cancelling the first contract) signed by the plaintiff wasn’t enough to bind him to the first contract (the contract the seller wanted to enforce).  On its face, that contract didn’t mention plaintiff and it wasn’t signed by him.

The court also rejected the seller’s judicial admission argument – that plaintiff’s complaint for the return of his earnest money was a judicial admission that he was party to the first contract.  A judicial admission is binding and conclusive on the party admitting a fact and withdraws that fact from the need to prove it at trial.  (¶ 53).

The court found that while the plaintiff’s complaint wasn’t the most artfully drafted one, it still alleged enough to demonstrate the plaintiff wasn’t a party to the first contract.  At most, plaintiff alleged (“admitted”) that he submitted a contingent offer to buy the buildings and that the offer was ultimately withdrawn.

Afterwords:

1/ Multiple writings, when read together, can satisfy SOF writing requirement;

2/ In a case (like here) where there is a patchwork of writings, the writing must explicitly refer to the underlying contract and show a connection to the contract to satisfy the SOF; and

3/ A complaint allegation can constitute a judicial admission but only if it is a definite, categorical statement.  If it’s vague or a hedging allegation, it likely won’t constitute a judicial admission.

 

 

 

 

Five-Year Limitations Period to Sue Dissolved Corporation Applies to Piercing Corporate Veil Suit – IL Court

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Peetom v. Swanson, 334 Ill.App.3d 523 (2nd. Dist. 2002) provides a dated yet instructive recitation of the statute of limitations standards that govern corporate veil piercing actions in Illinois.

The case’s relevant chronology includes: (1) Plaintiff filed a negligence action in 1995 against a corporate defendant for injuries plaintiff suffered in 1993, (2) In May 1997 – the corporate defendant was defaulted; (3) In June 1998, the corporate defendant was involuntarily dissolved by the Illinois Secretary of State for failure to file a report and pay its taxes, (4) In November 1998, a $1M money judgment entered against corporate defendant; and (5) in 2000, plaintiff filed suit against corporate shareholders under a veil piercing theory to enforce the 1998 default judgment.

The trial court dismissed the suit as untimely under the two-year limitations period for personal injury actions and the plaintiff appealed.

Held: Reversed.

Q: Why?

A: The case involves the interplay between three limitations periods in the Code of Civil Procedure.  Section 13-202 sets forth a two-year limitations period for personal injury claims, Section 12.80 of the Business Corporation Act requires a claim against a dissolved corporation (or its shareholders and directors) to be brought within five years after dissolution, and Code Section 12-108 provides for a seven-year period to enforce a judgment.  735 ILCS 5/13-202, 815 ILCS 5/12.80, 735 ILCS 5/12-108.

Since piercing the corporate veil is an equitable remedy and not a cause of action, the limitations period applicable to a piercing claim is governed by the nature of the underlying cause of action.  The question is “which underlying action?”  The 1995 negligence suit or the 2000 action to enforce the money judgment against the corporate shareholders?

The court rejected the shareholder defendants’ argument that the 1995 case was the underlying claim and that the two-year period for personal injury suits applied.  The court found that plaintiff’s 2000 piercing action, which sought to affix liability to the shareholder defendants for the $1M money judgment against the corporation, was the underlying claim for purposes of applying the statute of limitations.  The court found that in the 2000 case, Plaintiff was not alleging negligence against the shareholders but was instead trying to enforce the 1998 judgment assessed against the dissolved corporation.  As a result, Plaintiff would normally have seven years – through November 2005 – to sue on the money judgment.

However, since the corporate defendant was dissolved, the five-year period for suing a dissolved corporation and its shareholders based on pre-dissolution debts applied.  Plaintiff’s piercing suit was still timely though.  The judgment entered in 1998 and plaintiff filed suit in 2000 – well within the five-year period.

The other argument the First District rejected was defendant’s claim that the five-year period to sue a defunct corporation didn’t apply since at the time the corporation was dissolved, the plaintiff’s claim hadn’t yet been reduced to judgment and so plaintiff didn’t have an existing claim prior to the dissolution.

The court disagreed and found that since the corporation had been defaulted in 1997 – prior to the 1998 dissolution – the plaintiff’s claim against the corporation had already been deemed valid even though the plaintiff’s money claim wasn’t mathematically certain until after the company dissolved.  As a consequence, plaintiff had a pre-existing claim against the corporation under the Illinois BCA to trigger application of the five-year limitations period.

Afterwords:

An obvious pro-creditor decision.  The case stands for proposition that in a judgment creditor’s action against corporate shareholders to pierce the corporate veil after an earlier, unsatisfied judgment against a corporation, the seven-year limitations period to enforce a judgment applies.  The only reason the five-year period applied here was because of the specific BCA section (815 ILCS 5/12.80) that speaks to suing dissolved corporations.

Still, the plaintiff’s suit was timely as he filed well before the 2003 deadline.  Had the defendant prevailed, the plaintiff’s claim would have been barred if he didn’t sue in 1995 – two years after plaintiff’s underlying personal injury.

Debtor’s (Non-Spousal) Inherited IRA Not Exempt from Civil Judgment – IL First District Rules

Case: In re Marriage of Xenakis, 2015 IL App (1st) 141297

Fact Snapshot: The judgment debtor successfully moved to discharge citations issued to the custodian of an individual retirement account (IRA) he inherited from his deceased mother.  The judgment creditor appealed, arguing that the IRA wasn’t properly exempt from the judgment’s reach.

Result: The First District agreed with the creditor and reversed the trial court’s discharge of the citations.

Memorable Quote: “We find no indication that the Illinois legislature intended to allow a judgment debtor to exempt assets that could be spent freely and frivolously at the debtor’s whim.  The [post-judgment statute] is aimed at protecting retirement assets as opposed to funds that could, conceivably, be used to supplement the lifestyle of a non-retiree debtor.”

Reasoning:

– The purpose underlying exemptions from judgments is the protection of a debtor’s essential needs.  Setting aside funds for retirement is a court-recognized example of a debtor protecting his essential needs;

– Code Section 12-1006 exempts retirement plan assets from actions to collect a judgment so long as the retirement plan is intended in good faith to qualify as one under the Internal Revenue Code of 1986;

– Code Section 12-1006 is silent on the difference between a traditional IRA and an inherited non-spousal IRA, such as the one involved in this case and is the functional equivalent of Section 522 of the Bankruptcy Code which governs debtor exemptions from the bankruptcy estate;

– The US Supreme Court has held that money in an inherited IRA does not qualify as “retirement funds” under Bankruptcy Code Section 522 1

– Funds in a non-spousal inherited IRA, on their face, are not set aside for purposes of retirement;

– Unlike in a traditional IRA, the beneficiary of an inherited IRA can freely withdraw funds at any time with no tax penalty.  In fact, the owner of an inherited IRA must withdraw its funds – either in total within 5 years of the original owner’s death or via minimum annual withdrawals 2;

– Since inherited retirement funds can be withdrawn and spent by the account holder whenever he wants, these funds don’t serve the purpose of providing a debtor with the “basic necessities of life” and so do not implicate the policies that underlie judgment exemptions;

– An inherited IRA has nothing to do with retirement since the holder can spend it at will.  It is more akin to a discretionary bank account;

(¶¶ 18-26)

After canvassing the Federal bankruptcy Code, the Internal Revenue Code, the Illinois judgment exemption statutes and the foundational rationale for the exemptions, the First District squarely held that non-spousal inherited IRAs can be attached (i.e. are not exempt) by judgment creditors.

Afterwords:

1/ Exemptions serve salutary purpose of protecting debtor from destitution and abject poverty;

2/ Retirement accounts further that prophylactic purpose;

3/ This policy of protecting debtors has limits though.  If “retirement” funds can be withdrawn and spent at will, the funds won’t be treated as retirement funds and will be within a creditor’s reach.

————————-

References:

1  Clark v. Rameker, 134 S.Ct. 2242 (2014); 11 U.S.C. §§ 522(b), (d).

2  26 U.S.C. § 408(d)(3)(C)(ii)(2012)

Time Of Essence Clauses and Installment Payments: How Late Is Too Late?

In Handler v. Johnson, 2015 WL  4506712 (N.D.Ill. 2015), a bankrupt debtor’s adversary moved to reopen a case after the debtor was late on two installment payments under a settlement agreement.

The creditor, a lawyer who previously represented the debtors in unrelated litigation, sued to recover about $21K in attorneys’ fees owed from the prior representation.  The debtors previously agreed to pay the lawyer $7,500 in monthly installments of $100, payable on the 15th of each month.  When the debtors missed the deadline, the attorney creditor moved to reopen the bankruptcy and enter judgment for the full amount of his claim.

The court denied the motion on the basis that the breach was immaterial.  The creditor appealed.

Affirming, the Northern District provides a useful discussion of contractual time is of the essence clauses and the level of breach required to void a settlement agreement calling for payments over time.

Only a material breach will excuse the non-breaching party’s performance under a contract.  A technical or immaterial breach usually doesn’t merit the wholesale undoing of a contract.   If the contract would not have been made absent the disputed provision, then the breach is considered material.  While a party can recover damages in some situations for only a minor breach, he must prove how those damages flowed specifically from the minor breach.

Timely performance of a contract can be considered a material term, especially if the parties say so in the contract.  But even where parties have a time is of the essence provision and a party technically breaches, a court can still inquire into the circumstances underlying the delay in performance to determine whether the delay equals a material breach.  If timely performance is viewed as a material term, a court can still refuse to enforce the contract when to do so would work an unfairness to breaching party or provide a windfall to the non-breaching one.  (*3).

To determine whether a given contract term is material, the court considers several factors including (i) whether the breach defeats the bargained-for objective of the parties, (ii) whether the non-breaching party suffered disproportionate prejudice; (iii) whether economic inefficiency or waste will result by enforcing the subject contract term; and (iv) whether the non-breaching party would receive an inflated, unfair advantage if the court found a material breach.

Here, the equities pointed in the debtors’ favor.  While they did miss the payment deadline by a few days, the breach was tempered by the fact that one of the debtors was hospitalized around the time the payment was due.  Moreover, the lawyer adversary failed to establish any prejudice by having to wait a few days for payment.  Considered in their totality, the circumstances weighed in favor of finding that the tardy payment was not a material breach.  As a result, the District Court affirmed the bankruptcy court’s denial of the plaintiff’s motion to reopen the case.

Afterwords:

(1) Only a material breach will justify abandonment of a contract;

(2) Materiality in the breach context is a fact-specific inquiry that focuses on whether a contract would be made if the breached provision was excised;

(3) A court won’t undo an installment payment contract if payment is made a few days late and no prejudice is shown resulting from the late payment.

“Make Sure You Get My Good Side” – Blogger’s Use of Photo is Transformative, Fair Use – Defeats Copyright Suit (11th Cir.)

As someone who eats, drinks and sleeps social media marketing and blogging, this 11th Circuit case naturally captured my attention.

The plaintiff in Katz v. Chevaldina, 2015 WL 5449883 (11th Cir. 2015), Raanan Katz, a Miami businessman and co-owner of the Miami Heat, sued the defendant – one of plaintiff’s former commercial tenants and a full-time blogger – for using his photograph in 25 separate blog posts that derided Katz’s real estate business practices.  The “embarrassing”, “ugly,” and “compromising” photo (according to Katz) was taken by a photographer who originally published it on-line in an Israeli newspaper, the Haaretz.  Defendant later found the photo on Google images and used it as an illustration in her scathing posts.

After taking an assignment of the photo’s copyright from its photographer, Katz sued the defendant for copyright infringement.  The District Court granted summary judgment for the blogger on the basis that her use of the photograph was satirical commentary and a fair use of the image.  Katz appealed.

Held: Affirmed.

Rules/Reasons:

Section 107 of the Copyright codifies the fair use doctrine which posits that use of a copyrighted work that furthers “criticism, comment, news reporting, teaching, scholarship, or research” is not an infringement.  17 U.S.C. s. 107.

The four factors a court considers to determine whether fair use applies are (1) the purpose and character of the allegedly infringing use (here, reproducing the photo of plaintiff on defendant’s blog), (2) the nature of the copyrighted work; (3) the amount of the copyrighted work used; and (4) the effect of the use on the potential market or value of the copyrighted work. (*2).

The Court held that three of the four factors (1, 2 and 4) weighed in favor of a fair use and affirmed summary judgment for the defendant.

(1) Purpose and Character

This factor requires the court to consider whether the use serves a nonprofit educational purpose as opposed to a commercial one and the degree to which the infringing use is “transformative” as opposed to a “superseding” use of the copyrighted work.

A use is transformative where it adds something new to a copyrighted work and infuses it with a different character and “new expression, meaning or message.”  A use of a copyrighted work doesn’t have to alter or change the work for the use to be transformative.

The court found that defendant’s use of plaintiff’s photo was both educational and transformative.  It found that the defendant posted the photo as an adjunct to articles in which she sharply criticized plaintiff’s business practices and she made no money from her use of the photo.  Her use of the photo satisfied the “comment” and “criticism” components of the fair use doctrine.

The use of photo was transformative because the defendant used it to make fun of (“satirize”) the plaintiff and impugn his business ethics.  At bottom, the defendant’s use of the photo was a critical statement and therefore transformative under copyright law.

(2) Nature of Copyrighted Work

Copyright law gives more protection to original, creative works than to derivative works or factual compilations.  Courts consider whether a work was previously published and whether the work is creative or factual.  Here, the photo was previously published in an Israeli newspaper and its use in the defendant’s blog was mainly factual.

Noting that “photography is an art form” rife with creative decisions such as tone, lighting, and camera angle, the Katz photo was a simple candid shot taken in a public forum.  It lacked any badges of creativity that could give it strengthened copyright protection.  The court also pointed out there was no evidence the original photographer sought to convey emotion or ideas through the photo.

(3) Amount of Work Used

This fair use factor considers the amount of the copyrighted work used in proportion to the whole.  This factor is less relevant when considering a photograph though since most of the time the entire photo must be used to preserve its meaning.  That was the case here: defendant had to use all of Katz’s photo to preserve its meaning.  Ultimately, because the defendant used the whole photo as an adjunct to her blog posts, the “amount used” factor was a wash or “neutral”.

(4) Effect of the Infringing Use on the Potential Market for the Work

This factor asks what would happen if everyone did what the defendant did and whether that would cause substantial economic harm to the plaintiff by materially impairing his incentive to publish the work.  The court found this fair use factor easily weighed in defendant’s favor.  In fact, the plaintiff profoundly disliked the photo and did not want it published anywhere at any time.  According to the court, because Katz used copyright law to squelch defendant’s criticism of him, there was no potential market for the photo.

Afterword:

Since three of the four fair use elements weighed in favor of the defendant, the court found that her use of the plaintiff’s photo was a fair use and immune  from copyright infringement liability.

This case provides a useful detailed summary of the four fair use factors along with instructive analysis of each factors sub-parts.  The Katz case is especially pertinent to anyone facing a copyright claim predicated on a claimed infringing use of a Google images photograph used to enhance on-line content.

 

 

 

 

 

Commercial Landlord’s Suit for Rent Damages Accruing After Possession Order Survives Tenant’s Res Judicata Defense

18th Street Property, LLC v. A-1 Citywide Towing & Recovery, Inc., 2015 IL App (1st) 142444-U examines the res judicata and collateral estoppel doctrines in a commercial lease dispute.

The plaintiff landlord obtained a possession order and judgment in late 2012 on a towing shop lease that expired March 31, 2013. 

About six months after the possession order, the lessor sued to recover rental damages through the lease’s March 2013 end date.  The defendant moved to dismiss on the basis of res judicata and collateral estoppel arguing that the landlord’s damage claim could have and should have been brought in the earlier eviction suit.  The trial court agreed, dismissed the suit and the lessor plaintiff appealed.

Held: Reversed.

Q: Why?

A:  Res judicata (claim preclusion) and collateral estoppel (issue preclusion) seek to foster finality and closure by requiring all claims to be brought in the same proceeding instead of filing scattered claims at different times.

Res judicata applies where there is a final judgment on the merits, the same parties are involved in the first and second case, and the same causes of action are involved in the cases.  

Res judicata bars the (later) litigation of claims that could have brought in an earlier case while collateral estoppel prevents a party from relitigating an issue of law or fact that was actually decided in an earlier case.  (¶¶ 20-21, 30)

In Illinois, a commercial landlord’s claim for past-due rent and for future rent on an abandoned lease are different claims under the res judicata test.

This is because the payment of future rent is not a present tenant obligation and a tenant’s breach of lease usually will not accelerate rent (i.e. require the tenant to immediately pay the remaining payments under the lease) unless the lease has a clear acceleration clause.  Each month of unpaid rent gives rise to fresh claims for purposes of res judicata.

The landlord’s remedy where a tenant breaches a lease is to (a) sue for rents as they become due, (b) sue for several accrued monthly installments in one suit, or (c) sue for the entire amount at the end of the lease.

The commercial lease here gave the landlord a wide range of remedies for the tenant’s breach including acceleration of rental payments. 

The tenant defendant argued that since the lessor failed to try to recover future rent payments in the earlier eviction case, it was barred from doing so in the second lawsuit.  The landlord claimed the opposite: that its claims for damages accruing after the possession order were separate and not barred by res judicata or collateral estoppel.

The court held that res judicata did not bar the lessor’s post-possession order damage suit.  It noted that while the lease contained an optional acceleration clause, it was one of many remedies the landlord had if the tenant breached.  The lease did not require the landlord to accelerate rents upon the tenant’s breach. 

The court also noted that the lease required the landlord to notify the tenant in writing if it (the landlord) was going to terminate the lease.  Since terminating the lease was a prerequisite to acceleration, the Court needed more evidence as to whether the lessor terminated the lease.  Without any termination proof, the trial court should not have dismissed the landlord’s suit.

Afterwords:

1/ If a lease does not contain an acceleration clause, a landlord can likely file a damages action after an earlier eviction case without risking a res judicata or collateral estoppel defense.

2/ If a lease contains mandatory acceleration language, the landlord likely must sue for all future damages coming due under the lease or else risk having its damages cut off on the possession order date.

 

 

Corporate Officer Can’t Tortiously Interfere with His Company’s Contract; No Punitives for Breach of Contract – ND IL

In Richmond v. Advanced Pain Consultants, P.C., 2015 WL 4971040 (N.D.Ill. 2015), the plaintiff sued the defendants – two companies that operated suburban (Chicago) pain clinics and their doctor principal – claiming several thousand dollars in unpaid computer and accounting services plaintiff performed at the clinics over a several-month period.  The plaintiff brought claims for overtime under the Federal Fair Labor Standards Act and joined companion state law claims for breach of contract, quantum meruit and tortious interference with contract.  The defendants moved to dismiss plaintiff’s claims arguing preemption and the failure to state a claim, among other things.

In dismissing some of plaintiff’s claims (and sustaining others), the Northern District stressed some vital pleading rules and substantive law principles that apply in Federal court litigation.

Federal Notice Pleading Requirements

Federal Rule 8(a)(2) requires a “short and plain statement of the claim showing a pleader is entitled to relief.”  The plaintiff must provide enough factual context to rise above a speculative level so that a defendant has “fair notice” of what the plaintiff’s claim is.  However, “threadbare recitals of the elements of a cause of action” are not enough to survive a Rule 12(b)(6) dismissal motion.

Preemption and Punitive Damages

The defendant first argued the plaintiff’s common law claims (breach of contract, quantum merit, tortious interference) were preempted by the FLSA.  FLSA preempts common law claims that seek to recover overtime or minimum wage compensation.  But if the plaintiff’s claim seeks something other than overtime or minimum wage payments, those claims aren’t preempted.  Here, several of the plaintiff’s claims were for “regular wages” (not overtime) and so were not preempted by FLSA.

The court next struck plaintiff’s punitive damages claim from his breach of contract suit.  Under Illinois law, contract law’s sole purpose is to compensate the nonbreaching party.  It does not seek to punish the breaching party or give an economic windfall to the plaintiff.  This is true even if the breach is intentional.  Punitive damages can only be allowed in the breach of contract setting where the breach is itself an actionable, independent tort (e.g. a civil conspiracy, fraud, etc.).  Since there was no independent tortious conduct over and above the breach of contract – failure to pay plaintiff for his office services – the court struck plaintiff’s punitive damages claims.

Tortious Interference Against A Single-Member Corporation

The court dismissed the plaintiff’s tortious interference claims against the individual defendant – the sole shareholder of the two corporate defendants.

To state a claim for tortious interference with contract, a plaintiff must allege: (i) the existence of a valid and enforceable contract between a plaintiff and another; (ii) defendant’s awareness of the contractual obligation; (iii) defendant’s intentional and unjustified inducement of a breach of contract; (iv) breach of the contract by the third party caused by the defendant’s wrongful conduct.

A colorable tortious interference claim requires the involvement of at least three entities: (1)-(2) the parties to the contract and (3) the person inducing the breach.

Here, the individual defendant was the sole officer and manager of the two defendant medical offices who had unchallenged authority to make all hiring and firing decisions for the two entities.  The court noted that the two corporate defendants wouldn’t exist without the individual defendant.  There were no other shareholders or parties who had an interest in the corporate defendants.  Since the individual defendant was the only operator and stakeholder in the corporate defendants, he could not tortuously induce a breach of (effectively) his own contract with the plaintiff.

Afterwords:

The case provides some useful damages law reminders including that in a breach of contract suit, punitive damages normally can’t be recovered.  The plaintiff must show that the defendant’s breach is itself an intentional tort for a punitive claim possibly to lie.

Advanced Pain Consultants also makes clear that an officer of a corporation cannot tortiously interfere with a contract involving that corporation where that officer is the only shareholder of the corporation and has sole responsibility for the corporation’s business.

 

Illinois Court Examines Trade Secrets Act and Inevitable Disclosure Doctrine In Suit Over Employee Wellness Health Program

The plaintiff workplace wellness program developer sued under the Illinois Trade Secrets Act in Destiny Health, Inc. v. Cigna Corporation, 2015 IL App (1st) 142530, alleging a prospective business partner pilfered its confidential data.

Affirming summary judgment for the defendants, the First District appeals court asked and answered some prevalent trade secrets litigation questions.

The impetus for the suit was the plaintiff’s hoped-for joint venture with Cigna, a global health insurance firm.  After the parties signed a confidentiality agreement, they spent a day together planning their future business partnership.  The plaintiff provided some secret actuarial and marketing data to Cigna to entice the firm to partner with plaintiff.  Cigna ultimately declined plaintiff’s overtures and instead teamed up with IncentOne – one of plaintiff’s competitors.  The plaintiff sued and claimed that Cigna incorporated many of plaintiff’s program elements into Cigna’s current arrangement with IncentOne.  The trial court granted Cigna’s motion for summary judgment and plaintiff appealed.

Held: Affirmed.

Rules/Reasons:

On summary judgment, the “put up or shut up” moment in the lawsuit, the non-moving party must offer more than speculation or conjecture to beat the motion.  He must point to evidence in the record that support each element of the pled cause of action.  In deciding a summary judgment motion, the trial court does not decide a question of fact.  Instead, the court decides whether a question of fact exists for trial.  The court does not make credibility determinations or weigh the evidence in deciding a summary judgment motion.

The Illinois Trade Secrets Act (765 ILCS 1065/1 et seq.) provides dual remedies: injunctive relief and actual (as well as punitive) damages for misappropriation of trade secrets.  To make out a trade secrets violation, a plaintiff must show (1) existence of a trade secret, (2) misappropriation through improper acquisition, disclosure or use, and (3) damage to the trade secrets owner resulting from the misappropriation. (¶ 26)

To show misappropriation, the plaintiff must prove the defendant used the plaintiff’s trade secret.  This can be done by a plaintiff offering direct (e.g., “smoking gun” evidence) or circumstantial (indirect) evidence.  To establish a circumstantial trade secrets case, the plaintiff must show (1) the defendant had access to the trade secret, and (2) the trade secret and the defendant’s competing product share similar features.  (¶ 32)

Another avenue for trade secrets relief is where the plaintiff pursues his claim under the inevitable disclosure doctrine.  Under this theory, the plaintiff claims that because the defendant had such intimate access to plaintiff’s trade secrets, the defendant can’t help but (or “inevitably” will) rely on those trade secrets in its current position.  However, courts have made clear that the mere sharing of exploratory information or “preliminary negotiations” doesn’t go far enough to show inevitable disclosure.

Here, there was no direct or circumstantial evidence that defendant misappropriated plaintiff’s actuarial or financial data.  While the plaintiff proved that defendant had access to its wellness program components, there were simply too many conceptual and operational differences between the competing wellness programs to support a trade secrets violation.  These differences were too stark for the court to find misappropriation. (¶ 35)

Plaintiff also failed to prove misappropriation via inevitable disclosure.  The court held that “[a]bsent some evidence that Cigna [defendant] could not have developed its [own] program without the use of [Plaintiff’s] trade secrets,” defendant’s access to plaintiff’s data alone was not sufficient to demonstrate that defendant’s use of plaintiff’s trade secrets was inevitable.  (¶¶ 40-42).

Afterwords:

A viable trade secrets claim requires direct or indirect evidence of use, disclosure or wrongful acquisition of a plaintiff’s trade secrets;

Access to a trade secret alone isn’t enough to satisfy the inevitable disclosure rule.  It must be impossible for a defendant not to use plaintiff’s trade secrets in his competing position for inevitable disclosure to hold weight;

Preliminary negotiations between two businesses that involve an exchange of sensitive data likely won’t give rise to an inevitable disclosure trade secrets claim where the companies aren’t competitors and there’s no proof of misappropriation.  To hold otherwise would stifle businesses’ attempts to form economically beneficial partnerships.

 

Basketball Deity Can Add Additional Plaintiff in Publicity Suit Versus Jewel Food Stores – IL ND (the ‘Kriss Kross Will Make You…Jump’ Post(??)

There’s No Way(!) I’m going to simply pull-and-post just any Google Image of His Airness and hope no one sees it (or, more accurately, takes it seriously enough to engage in some copyright saber-rattling about it).  Not after Michael Jordan is fresh off his nearly $9M Federal jury verdict in a publicity suit against erstwhile Chicago grocer Dominick’s and its parent company.  I didn’t even know he filed a companion suit – this one against Jewel Food Stores – another iconic Midwest grocery brand – pressing similar publicity claims against the chain for using his image without his permission.  Now I do.

In fact, just a couple days before that Friday night Federal jury verdict in the Dominick’s suit, Jordan successfully moved to add his loan-out company1, Jump 23, Inc. as a party plaintiff in his Jewel suit.  The Jewel case, like its Dominick’s case counterpart, stems from Jewel’s use of Jordan’s likeness in an ad congratulating him on his 2009 hoops Hall of Fame induction.

In granting Jordan’s motion to add the Jump 23 entity, the court in Jordan v. Jewel Food Stores, Inc., 2015 WL 4978700 (N.D.Ill. 2015), quite naturally, drilled down to the bedrock principles governing amendments to pleadings in Federal court as expressed in the Federal Rules of Civil Procedure.

In the Federal scheme, Rule 15 controls pleading amendments and freely allows amendments to pleadings “when justice so requires.”  Rule 15(c)(1)(C) governs where an amended claim is time-barred (filed after the statute of limitations expires) and seeks to add a new claim or a new party.  If the party or claim to be added stems from the same transaction as the earlier pleading, the amended pleading will “relate back” to the date of the timely filed claim.

Assuming an amended claim arises out of the same conduct, transaction or occurrence as the earlier (and timely) claim, the (normally) time-barred claim will be deemed timely as long as the party to be brought in by the amendment (1) received such notice of the action that it will not be prejudiced in defending the suit on the merits; and (2) knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party’s identity.

While Rule 15 only speaks to bringing in additional defendants, it’s rationale extends to situations where a party seeks to add a new plaintiff.  Delay alone in adding a party (either plaintiff or defendant) usually isn’t enough to deny a motion to amend to add a new party. Instead, the party opposing amendment (here, Jewel) must show prejudice resulting from the joined party.  Prejudice here means something akin to lost evidence, missing witnesses or a compromised defense caused by the delay.

In this case, the court found there was no question that the Jump 23 entity was aligned with Jordan’s interests and its publicity claim was based on the same conduct underlying Jordan’s.  It also found there was no prejudice to Jewel in allowing Jump 23 to be added as co-plaintiff.  The court noted that Jump 23’s addition to the suit didn’t change the facts and issues in the case and didn’t raise the specter of increased liability for Jewel.  In addition, the court stressed that Jewel is entitled to use the written discovery obtained in the Dominick’s case.  As a result, Jewel won’t be exposed to burdensome additional discovery by allowing the addition of Jump 23 as plaintiff.

Take-away:

This case provides a good summary of Rule 15 amendment elements in the less typical setting of a party seeking to add a plaintiff as a party to a lawsuit.  The lesson for defendants is clear: delay alone isn’t severe enough to deny a plaintiff’s attempt to add a party.  The defendant (or person opposing amendment) must show tangible prejudice in the form of lost evidence, missing witnesses or that its ability to defend the action is weakened by the additional parties’ presence in the suit.

Jordan versus Jewel is slated for trial in December 2015.  I’m interested to see how the multi-million dollar Dominick’s verdict will impact pre-trial settlement talks in the Jewel case.  I would think Jordan has some serious bargaining leverage to exact a hefty settlement from Jewel.  More will be revealed.

  1. Loan-out company definition (see http://www.abspayroll.net/payroll101-loan-out-companies.html)

 

Piercing the Corporate Veil Not a Standalone Cause of Action: It’s A Remedy – IL Court Rules

Gajda v. Steel Solutions Firm, Inc., 2015 IL App (1st) 142219, stands as a recent discussion of the standards governing section 2-619 motions, successor liability and whether piercing the corporate veil is a cause of action or only a remedy for a different underlying legal claim.

The plaintiffs alleged they were misclassified as independent contractors instead of employees under the Illinois Employee Classification Act (820 ILCS 185/60) by their employer and one of its principals.  The plaintiffs sued under piercing the corporate veil and successor liability theories.  The trial court dismissed all of the plaintiffs’ claims and they appealed.

Reversing the trial court and sustaining the bulk of plaintiffs’ claims, the First District stressed some important recurring procedural and substantive rules in corporate litigation.

Piercing the corporate veil – Standalone cause of action or remedy?

Answer: remedy.  In Illinois, piercing the corporate veil is not a cause of action but is instead a “means of imposing liability in an underlying cause of action.”  In the usual piercing setting, once a party obtains a judgment against a corporation, the party can then “pierce” the corporate veil of liability protection and hold the dominant shareholder(s) responsible for the corporate obligation.  Piercing can also be used to reach the assets of an affiliated or “sister” corporation.

Here, since the plaintiff captioned their first count as one for piercing the corporate veil, the trial court properly dismissed the claim on defendant’s Section 2-615 motion since piercing isn’t a recognized cause of action in Illinois.  (¶¶ 19-24).  However, the court did find that the plaintiff’s factual allegations that the defunct predecessor and its successor were alter-egos of each other, that they commingled one another’s funds and made improper loans to each other were sufficient to state a claim for piercing the corporation veil as a remedy (not a separate cause of action).  (¶ 25).

Successor Liability

The court then applied Illinois’ established successor liability rules to both the defunct and current employers.  A company that purchases another company’s assets normally isn’t responsible for the purchased company’s debt.  Exceptions to this rule against corporate successor non-liability include (1) where there is an express or implied agreement or assumption of liability; (2) where a transaction amounts to a consolidation or merger of the buyer and seller companies; (3) where the buying entity is a “mere continuation” of the selling predecessor entity; and (4) where the transaction is fraudulent in that it is done so that the selling entity can evade liability for its financial obligations. (¶ 26).

Here, the plaintiff’s allegations that showed an overlap in the buying and selling entities’ management and employees as well as the complaint’s assertions that the predecessor and successor companies were commingling funds were sufficient to make out a case of mere continuation successor liability. (¶ 26).

Afterwords:

This case cements proposition that piercing isn’t a standalone cause of action – but is instead a remedy where there is an underlying failure to follow corporate formalities.  The case is also useful for its providing some clues as to what facts a plaintiff must allege to state a colorable successor liability claim under Illinois law.

Economic Loss Rule Requires Reversal of $2.7M Damage Verdict In Furniture Maker’s Lawsuit- 7th Circuit

In a case that invokes Hadley v. Baxendale** – the storied British Court of Exchequer case published just three years after Moby-Dick (“Call me ‘Wikipedia’ guy?”) and is a stalwart of all first year Contracts courses across the land – the Seventh Circuit reversed a multi-million dollar judgment for a furniture maker.

The plaintiff in JMB Manufacturing, Inc. v. Child Craft, LLC, sued the defendant furniture manufacturer for failing to pay for about $90,000 worth of wood products it ordered.  The furniture maker in turn countersued for breach of contract and negligent misrepresentation versus the wood supplier and its President alleging that the defective wood products caused the furniture maker to go out of business – resulting in millions of dollars in damages.

The trial court entered a $2.7M money judgment for the furniture maker on its counterclaims after a bench trial.

The Seventh Circuit reversed the judgment for the counter-plaintiff based on Indiana’s economic loss rule.  

Indiana follows the economic loss doctrine which posits that “there is no liability in tort for pure economic loss caused unintentionally.”  Pure economic loss means monetary loss that is not accompanied with any property damage (to other property) or personal injury.  The rule is based on the principal that contract law is better suited than tort law to handle economic loss lawsuits.  The economic loss rule prevents a commercial party from recovering losses under a tort theory where the party could have protected itself from those losses by negotiating a contractual warranty or indemnification term.

Recognized exceptions to the economic loss rule in Indiana include claims for negligent misrepresentation, where there is no privity of contract between a plaintiff and defendant and where there is a special or fiduciary relationship between a plaintiff and defendant. 

The court focused on the negligent misrepresentation exception – which is bottomed on the principle that a plaintiff should be protected where it reasonably relies on advice provided by a defendant who is in the business of supplying information. (p. 17).

The furniture maker counter-plaintiff’s negligent misrepresentation claim versus the corporate president defendant failed based on the agent of a disclosed principal rule.  Since all statements concerning the moisture content of the wood imputed to the counter-defendant’s president were made in his capacity as an agent of the corporate plaintiff/counter-defendant, the negligent misrepresentation claim failed.

The court also declined to find that there was a special relationship between the parties that took this case outside the scope of the economic loss rule.  Under Indiana law, a garden-variety contractual relationship cannot be bootstrapped into a special relationship just because one side to the agreement has more formal training than the other in the contract’s subject matter.

Lastly, the court declined to find that the corporate officer defendant was in the business of providing information.  Any information supplied to the counter-plaintiff was ancillary to the main purpose of the contract – the supply of wood products.

In the end, the court found that the counter-plaintiff negotiated for protection against defective wood products by inserting a contract term entitling it to $30/hour in labor costs for re-working deficient products.  The court found that the counter-plaintiff’s damages should have been capped at the amount representing man hours expended in reconfiguring the damaged wood times $30/hour – an amount that totaled $11,000. (pp. 9-17, 24).

Take-aways:

1/ This case provides a good statement of the economic loss rule as well as its philosophical underpinnings.  It’s clear that where two commercially sophisticated parties are involved, the court will require them to bargain for advantageous contract terms that protect them from defective goods or other contingencies;

2/ Where a corporate officer acts unintentionally (i.e. is negligent only), his actions will not bind his corporate employer under the agent of a disclosed principal rule;

3/ A basic contractual relationship between two merchants won’t qualify as a “special relationship” that will take the contract outside the limits of Indiana’s economic loss rule.

 ————————

** Hadley v. Baxendale is the seminal breach of contract case that involves consequential damages.  The case stands for the proposition that the non-breaching party’s recoverable damages must be foreseeable (ex: if X fails to deliver widgets to Y and Y loses a $1M account as a result, X normally wouldn’t be responsible for the $1M loss (unless Y made it clear to X that if X breached, Y would lose the account, e.g.) [https://en.wikipedia.org/wiki/Hadley_v_Baxendale]

Michael Keaton Defeats Production Company’s “Merry Gentleman” Breach of Contract Suit – ‘Reliance’ Damages Summary

“The ultimate badass introduction. Say this upon meeting someone tough and they’ll never mess with you.”

That’s how no less an authority than Urban Dictionary (who said I wasn’t high-brow?!!) describes “I’m Batman!” – a film-defining movie line that seems to have been catapulted into cultural idiom status. (http://www.urbandictionary.com/define.php?term=I’m+Batman)

Not sure if Michael Keaton unveiled this quiver-inducing Statement as a breach of contract defense but the Seventh Circuit did recently rule in the actor’s favor in a multi-million dollar contract dispute that’s the genesis of Merry Gentleman, LLC v. George and Leona Productions, Inc. (http://caselaw.findlaw.com/us-7th-circuit/1711569.html)

There, the plaintiff production company sued the famed actor and one of his companies for damages, alleging Keaton failed to deliver timely versions or “cuts” of a film, failed to cooperate in the distribution and marketing of the film and was derelict in his film post-production obligations.

The suit concerns 2009’s The Merry Gentleman, a motion picture directed by and acted in by Keaton that was a box office bust but was lauded by some critics, including the late Roger Ebert.  The plaintiff claimed Keaton breached his director duties at the movie’s pre-production, distribution and post-production phases and sought a cool $5.5M in damages – the amount plaintiff claimed it spent producing and marketing the film.  Keaton won summary judgment on the basis that plaintiff couldn’t prove a causal link between Keaton’s’ breach and the plaintiff’s claimed damages.  Plaintiff appealed.

The Seventh Circuit affirmed and in doing so, espoused some key contract damages guideposts.

The two entrenched contract damage schemes are expectation damages and the more remote reliance damages.  Expectation damages apply where a party seeks the “benefit of his bargain”; what he would have received had the breaching party performed.  Reliance damages, by contrast, involve a plaintiff getting reimbursed for loss caused by his reliance on the contract.

Classic reliance damages include preparatory costs: those expenses incurred by a plaintiff in preparing for performance of a contract minus any loss he would have suffered had the contract been performed.  Restatement (Second) of Contracts, § 349.

Reliance damages are designed to compensate a plaintiff who is unable to demonstrate expectation damages.  Reliance damages involve a burden-shifting analysis where a plaintiff must first prove his expense outlay in preparing for performance.  The burden then shifts to the defendant to prove what damages the plaintiff would have sustained if the contract was performed.

While reliance damages present a lower proof hurdle than do expectation damages, the breach of contract plaintiff must still produce evidence that the claimed losses were both caused by the breach and foreseeable.

Typically, reliance damages apply where one party to a contract has walked away without performing.  The plaintiff then recovers the expenses it incurred in its own preparation for performance.  Here, though, the court emphasized, Keaton did perform: he made and acted in the movie.  He also presented Merry Gentleman at the vaunted Sundance Film Festival.

The court said that if Keaton had failed to act in or direct the movie, then maybe the plaintiff could have recovered its reliance expenses.  However, since Keaton substantially performed his contractual obligations (acting and directing), plaintiff failed to prove how the actor’s claimed breaches caused over $5M in damages.  To allow plaintiff’s damages in this case meant that Keaton’s performance as director and actor was completely worthless – that plaintiff lost its entire multi-million dollar investment in the film based on Keaton’s breach.  The court refused to find that the actor’s services entirely lacked value.

Based on the plaintiff’s failure to establish proximate cause (that Keaton’s breach resulted in $5.5M in damages), the Seventh Circuit upheld summary judgment for defendants.

Afterwords:

This case provides a good summary of expectation and reliance contract law damages including when one damage scheme applies versus the other.

Merry Gentleman also illustrates in sharp relief how difficult it is for a plaintiff to recover reliance damages where the defendant substantially performs a contract.  This is especially so in a case like this where the claimed breach is subjective – involving the quality of performance – rather than a more readily measurable breach like a complete failure to perform.

Loss of Earning Capacity and The Self-Employed Plaintiff: What Damages Are Recoverable (IL 4th Dist. Case Note)

The plaintiff in Keiser-Long v. Owens, 2015 IL App (4th) 140612, a self-employed cattle buyer, sued for injuries she suffered in a car accident with the defendant.  The defendant admitted negligence and the parties went to trial on damages.

The defendant successfully moved for a directed verdict on plaintiff’s attempt to recover for lost earning capacity at trial and the Plaintiff appealed.

Reversing, the Fourth District appeals court expanded on the potential damages a personal injury claimant can recover where the plaintiff is self-employed and doesn’t draw a formal salary from the business she operates.

Illinois allows a plaintiff in a negligence suit to recover all damages that naturally flow from the commission of a tort.  Impaired earning capacity is a proper element of damages in a personal injury suit.  However, recovery is limited to loss that is reasonably certain to occur.  Lost earning capacity damages are measured by the difference between (a) the amount a plaintiff was capable of earning before her injury; and (b) the amount she is able to earn post-accident.

Lost earning capacity damages focus on an injured person’s ability to earn money instead of what she actually earned before an injury.  That said, a plaintiff pre- and post-accident earnings are relevant to a plaintiff’s damages computation.  ¶ 37.

Where a plaintiff is self-employed, a court can consider the plaintiff’s company’s diminution of profits as evidence of a plaintiff’s monetary damages where the plaintiff’s services are the dominant factor in producing profits.  By contrast, where a self-employed plaintiff’s involvement is passive and she relies on the work of others to make the company profitable, a profits reduction is not a proper damage element in a personal injury action.

The trial court granted the defendant’s motion for directed verdict since the plaintiff failed to present evidence that she lost income in the form of a salary or bonus from her cattle-buying business.

The appeals court reversed.  It noted that the plaintiff was solely responsible for her company’s profits and was the only one who travelled around the State visiting various cattle auctions and meeting with cattle sellers.  Plaintiff also offered expert testimony that she missed out on the chance to earn some $200,000/year in the years following the accident and that any company profits were labeled “retained earnings” and treated as the plaintiff’s personal retirement plan  ¶¶ 41-43.

The court held that since the plaintiff was the only one whose efforts dictated whether her cattle buying business was profitable or not, her business’s post-accident balance sheet was relevant to her recoverable damages.

The court also rejected the defendant’s argument that since plaintiff’s company was a C corporation (and not an S corp.1), profits and losses did not flow through to the plaintiff, the court should not have considered lost business income as an element of plaintiff’s damages.  The court found that any tax differences between C and S corporations were irrelevant since plaintiff was the cattle company for all intents and purposes.  As a result, any loss suffered by the company was tantamount to monetary loss suffered by the plaintiff.  ¶¶ 45-46.

The court’s final reason for reversing the trial court was a policy one.  Since the plaintiff’s corporation couldn’t sue the defendant, there was no potential for double recovery.  In addition, if the court prevented the plaintiff from recovering just because she didn’t earn a formal salary, this would operate as an unfair windfall for the defendant.  The end result is now the parties must have a retrial on the issue of plaintiff’s lost earning capacity.  ¶¶ 46-47.

Afterwords:

Owens provides a useful synopsis of when impaired earning capacity can be recovered in a personal injury suit.  In the context of a self-employed plaintiff, a plaintiff’s failure to draw a salary per se will not foreclose her from recovering damages; especially where the plaintiff – and not someone working for her – is the one mainly responsible for company profits.  In cases where the plaintiff is self-employed and is singularly responsible for a company’s profits, a loss in business income can be imputed to the defendant and awarded to the business-owner plaintiff.

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1  A C corporation is taxed at both the corporate level and at the shareholder level.  By contrast, an S corporation is not taxed at the corporate level; it’s only taxed at the shareholder individually. (This is colloquially termed “flow-through taxation.”)

Statute of Limitations and Installment Contracts: What is the Date of Breach and When Does the Limitations Period Start to Run – An IL Case Note

The statute of limitations defense and the equitable doctrine of laches are firmly-entrenched legal devices aimed at fostering finality in litigation.  The limitations and laches defenses both look to the length of time a plaintiff took to file suit and strive to balance a plaintiff’s right to have his claim heard on the merits with a defendant’s competing right to timely defend a lawsuit.

The inherent tension between the goals advanced by the limitations and laches defenses and the legal principle that everyone should have his or her day in court comes into sharp relief in cases involving multi-year contracts that are to be performed over time like a contract payable in annual installments.

Akhtert v. D’avis, 2013 IL App(1st) 113556-U, serves as a recent example of how difficult it can be to apply the statute of limitations and laches defenses where an oral contract doesn’t provide a clear end date and where it calls for yearly installment payments.

The oral agreement there provided that the defendant would use plaintiff’s medical facility to treat defendant’s patients in exchange for paying plaintiff between 40-50% of defendant’s gross income.  The defendant made monthly payments for about two years (from 2002-2004) and stopped.

The plaintiff didn’t sue until nearly seven years later (in 2011) and sought several years’ worth of payments it claimed it was owed by the defendant.  The defendant moved to dismiss plaintiff’s breach of contract claim on statute of limitations grounds and sought dismissal of plaintiff’s accounting action based on laches.  The trial court dismissed plaintiff’s claims as untimely and plaintiff appealed.

Held: Reversed in part.

Q: Why?

A: The court first held that the plaintiff’s breach of contract was timely as to all payments due within five years of the complaint’s 2011 filing date.

The statute of limitations for oral contracts in Illinois is five years, measured from the date where a creditor can legally demand payment from a debtor. 735 ILCS 13-205, (¶14).  Where a money obligation is payable in installments, the limitations period begins to run against each installment on the date the installment becomes due.  Each installment carries its own limitations period.

So, if you have a 2000 oral contract calling for annual payments starting in 2001 and wait until August 31, 2015 to sue, the suit will still be timely as to payments coming due within five years of the filing date (e.g. for all payments due on or after August 31, 2010).

Here, the court found the plaintiff’s suit was timely as to payments coming due on or after March 8, 2006 – five years preceding the 2011 complaint filing date.  Any payments due before March 8, 2006 were time-barred.

Next, the court addressed the defendant’s laches argument – asserted as a defense to plaintiff’s equitable accounting claim.  Laches is a “neglect or omission to assert a right, taken in conjunction with a lapse of time of more or less duration, and other circumstances causing prejudice to an adverse party” and applies where a plaintiff is seeking equitable (as opposed to legal or monetary relief). (¶ 25).

Laches applies where (1) a plaintiff files suit, (2) the plaintiff delays in filing the suit despite having notice of the existence of his claim, (3) the defendant lacks knowledge or notice of the existence of plaintiff’s claim, and (4) injury or prejudice resulting to the defendant by the plaintiff’s delay in filing suit.  Where the period of delay in bringing suit exceeds the applicable limitations period (here – the five-year period for breach of oral contracts), that delay will automatically constitutes laches.

The burden of showing laches is squarely on the defendant.  The mere lapse of time (between plaintiff’s knowledge of facts giving rise to a claim and plaintiff’s filing suit) isn’t enough.  The defendant must also show prejudice: that it is unfair to make him defend plaintiff’s delayed suit.

Here, the defendant couldn’t establish any unfairness in having to defend against plaintiff’s claims so it’s laches claim failed as to payments due within five years of the complaint filing date.

Take-aways:

Contracts payable in installments provide a separate limitations period for each breach;

An oral installment contract claim will be timely as to any payments pre-dating complaint date by five years;

Laches requires more than passage of time/delay between when a plaintiff is first armed with facts giving him a claim and when he actually files suit.  A defendant must also show prejudice – such as inability to track down witnesses and documents – in his ability to mount a defense based on the plaintiff’s lag time in bringing a claim to state a winning laches defense.

 

 

Shufflin’ Crew’s Right of Publicity Claim Not Pre-Empted by Copyright Law – IL Northern District Rules

Dent v. Renaissance Marketing Corp., 2015 WL 3484464 (N.D.Ill. 2015) involves a royalty dispute over the 1985 “Super Bowl Shuffle” – a storied (locally, at least) song and video performed by several Chicago Bears football players – the Shufflin’ Crew – to commemorate the Bears’ Super Bowl thrashing of the New England Patriots that year.

And while the case’s connection to football coupled with its celebrity-slash-nostalgia sensibility naturally piques a reader’s interest, the case is legally post-worthy mainly for its useful, quick-hits discussion of the operative rules governing Federal removal jurisdiction and copyright preemption.

The lawsuit pits former Bears players against a marketing firm and an individual who held a now-expired license to market the Shuffle video in an action challenging the defendants’ unauthorized use of the plaintiffs’ identities.

Removal and Remand

Removal (from state court to Federal court) is controlled by 28 USC s. 1441, which provides that any state court suit of which a Federal district court has original jurisdiction may be removed by the defendant;

Only state court cases that could have originally been filed in Federal court are subject to removal;

Once a case is removed to Federal court, it can be remanded (sent back) to the removing state court at any time where the Federal court loses subject matter jurisdiction;

Whether a case is ripe for removal is determined at time of removal – any post-removal amendments to a complaint normally won’t strip the Federal court of jurisdiction over the removed action;

A Federal court can retain supplemental jurisdiction over state law claims where the Federal claim is dismissed.  However, if all claims that gave the Federal court original jurisdiction are dismissed, the Federal court can (and most likely will) relinquish jurisdiction over the state law claims.

What About Preemption?

Preemption applies where a Federal law proverbially “covers the field.”  That is, the Federal law is so broad that it completely displaces state-law claims that cover the same topic.  If a state law complaint implicates (but doesn’t specifically mention) an expansive Federal law that touches on a complaint’s subject matter, that state law case can be removed to Federal court.

The Federal Copyright Act (17 U.S.C. s. 101 et seq.) is a prime example of a Federal statute that pre-empts equivalent state-law rights.  If a state law complaint involves legal and equitable rights that are within copyright’s subject matter, then that state law claim – even though it makes no mention of copyright law can still be removed to Federal court.  (**2-3).

To avoid copyright pre-emption in a royalty dispute, a state law claim must involve a right that is “qualitatively distinguishable” from the five copyright rights – the right to reproduce, distribute, perform, adapt (perform derivative works) and display a work. 17 U.S.C. ss. 106, 301.

Illinois Right of Publicity Act – Is it Pre-empted by the Copyright Act?

In a close call, the answer here was “no.”  The reason: there is a fine-line distinction between using a plaintiff’s identity or persona (which implicates a right to publicity) and infringing on a that plaintiff’s rights to publish (or distribute or reproduce or display) a given work (which invokes copyright law protections).

The Illinois Right of Publicity Act (“IRPA”) gives individuals the right to control and choose whether and how to use an individual’s identity for commercial purposes.  765 ILCS 1075/10.  IRPA bans the unauthorized use of a plaintiff’s personal identity for a commercial purpose.

The crux of the plaintiffs’ IRPA claim was that the defendants held themselves out as having an affiliation with or connection to the Shufflin’ Crew and used the Crew members’ personas in marketing defendants’ products and services.

The court found that the plaintiffs’ IRPA claim wasn’t pre-empted by copyright law.  The reason was because the plaintiffs’ IRPA claim was based on more than the defendants’ unauthorized marketing of the Super Bowl Shuffle music video.  Instead, the plaintiffs alleged the defendants traded in and profited from the crew members’ identities or “personas” in trying to sell Shuffle copies – an action distinct from performing or distributing the work itself.  Since plaintiffs’ IRPA claim was not based on unauthorized reproductions or distributions of the Shuffle music video, copyright law didn’t pre-empt the plaintiffs’ IRPA suit. (**4-5).

Once plaintiffs dropped their displaced state law claims (conversion, injunctive relief, declaratory relief), the Federal court remanded the remaining claims (IRPA, unjust enrichment, equitable accounting) to state court finding the state court better equipped to handle those claims.

Afterwords:

1/ When all Federal claims drop out of a removed case, a Federal court will likely remand the case to state court unless there is a compelling reason to keep it in Federal court;

2/ A state court action can be pre-empted by a Federal statute (like the Copyright Act) where the state court claims implicate Federal statutory rights and obligations even where the state claims make no mention of the Federal claims;

3/ The case illustrates that the respective legal interests vindicated by the Illinois Right to Publicity Act and Federal Copyright statute are similar yet still different enough to avoid pre-emption in certain factual contexts.

 

 

 

 

 

Fire Alarm Contract Doesn’t Create Implied Warranty Claim – IL ND

Two titans of their respective industries went head-to-head in Allstate Indemnity Company v. ADT, LLC, 2015 WL 3798715 (N.D.Ill. 2015), a dispute over an alarm company’s responsibility for fire damage to its homeowner customer.

After a 2013 house fire decimated its insured’s home to the tune of about $1.4M in damages, the plaintiff home insurer (Allstate) sued ADT, the home smoke and fire alarm installer, for negligence, breach of contract and consumer fraud for failing to complete smoke detector repairs it was hired to complete about 7 months before the fire.

The Northern District, in Allstate Indemnity Company v. ADT LLC, 2015 WL 3798715, *2 (N.D.Ill. June 17, 2015), granted ADT’s motion to dismiss the complaint with prejudice and in doing so, addressed some important issues involving contract interpretation, exculpatory provisions and damage limitations in home security contracts.

The 2007 alarm contract (the “Alarm Contract”) was for an initial three-year term and was automatically renewed for 30-day increments unless terminated in writing. The Alarm Contract contained a limited warranty and a waiver clause that provided that the alarm company was not an insurer against damage to the insured home.

Other than some basic warranties, ADT’s contract disclaimed consequential or incidental damages.

The court rejected the insurer’s argument that the contract’s damage waiver was unenforceable. In Illinois, an exculpatory clause or damage waiver is enforceable unless it is unconscionable or violates public policy. Since there were no public policy concerns implicated, the alarm contract damage waiver was upheld and defeated Allstate’s claims.

Allstate also lost its breach of implied warranty claim.  Illinois doesn’t recognize an implied warranty in service contracts. The only settings where a court recognizes an implied warranty is in (1) contracts involving the sale of goods, (2) contracts involving residential property construction (where the implied warranty of habitability attaches) and (3) construction contracts – where Illinois recognizes an implied warranty of performance in a good, workmanlike manner.

Since the Alarm Contract didn’t involve the sale of goods and wasn’t a construction contract, Allstate’s implied warranty claim failed.

Lastly, the court discarded Allstate’s consumer fraud claim.  The Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA), 815 ILCS 505/2 broadly prohibits unfair methods of competition and unfair or deceptive acts.  But where a consumer fraud claim simply duplicates a breach of contract claim, the consumer fraud count is redundant and should be stricken.

A plaintiff can’t “dress up” a garden-variety contract claim as one sounding in fraud.  Here, since Allstate repackaged its breach of contract suit and labeled it as a consumer fraud claim, the court dismissed Allstate’s ICFA claim.

Key take-aways:

1/ A clear waiver provision in a service contract will be enforced as written; even if it puts some financially harsh consequences on the plaintiff;

2/ Service contracts won’t give rise to an implied warranty claim in Illinois;

3/ A breach of contract does not equate to consumer fraud.  A repackaged breach of contract claim that is appended with a consumer fraud label will be dismissed as redundant (to the parallel breach of contract claim).

Reference: http://law.justia.com/cases/federal/district-courts/illinois/ilndce/1:2014cv09494/303656/21/

Talent Agency’s Implied In Law Contract Claim Survives Dismissal In Suit For TV Commercial Services

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Karen Stavins Enteprises, Inc. v. Community College District No. 508, 2015 IŁ App (1st) 150356 stands as a recent example of a plaintiff suing in quasi-contract – specifically, under an implied-in-law contract theory – to recover the reasonable value of unpaid acting services rendered in connection with a television commercial.

The plaintiff, a well-known Chicago talent agency, sued the City Colleges of Chicago’s corporate parent (“City Colleges”) when it failed to pay for the services of nine actors (just over $13K) booked by the plaintiff who starred in a commercial promoting the benefits of a City Colleges education.

The trial court dismissed the agency’s complaint on City Colleges’ Section 2-615 motion.  Plaintiff appealed.

Held: reversed.

Reasons:

City Colleges argued that the plaintiff’s claim failed because it didn’t comply with the procurement standards set forth in the Illinois Public Community College Act, 110 ILCS 805/3-27.1 – a statute that delineates specific requirements for a party entering a contract with a public educational entity.

Reversing the trial court’s dismissal, the appeals court first attacked City Colleges’ motion to dismiss on procedural grounds, noting that a Section 2-615 motion cannot be supported by affidavit or based on facts not contained within a complaint’s four-corners. 

Since City Colleges supported its motion with its agent’s affidavit testifying to some background facts concerning the creation of the commercial, the affidavit should have been excluded from consideration by the trial court.  (¶ 5).

Turning to the merits, the First District provides a useful primer on the salient rules governing implied in law contracts (“ILC”).

In Illinois, an ILC is not an express contract.  Instead, as the name suggests, it’s an implied promise by a recipient of services or goods to pay for them. 

An ILC presupposes that no actual agreement exists between parties, but the court imposes a duty to pay a reasonable value of the services in order to prevent unjust enrichment.  ILC’s “essence” is where a defendant voluntarily accepts a benefit from a plaintiff and fails to pay the plaintiff.

No ILC claim will lie, however, where there is an express contract (including a contract implied in fact) between the parties.  To state a valid ILC claim, a plaintiff must plead and prove specific facts that support the conclusion that a plaintiff conferred a benefit on a defendant who unjustly retained the benefit in violation of basic principles of fairness and good conscience.  Put another way, the plaintiff must establish he supplied valuable services to a defendant under circumstances where it’s unjust for the defendant to retain them without paying a reasonable value for the services.  (¶ 7).

Applying the operative ILC rules, the court found the talent agency plaintiff sufficiently pled that it booked actors to perform TV commercial services for City Colleges, that the actors weren’t working for free, and City Colleges’ refusal to pay.  Under Illinois pleading rules, this was enough of an ILC claim to survive City Colleges’ motion to dismiss.

Afterwords:

I’ve experienced how difficult it is to comply with a government entity’s (like a school, e.g.) byzantine contractual requirements.  Typically, you must follow the procurement rules to the letter or else risk case dismissal – usually for a failure to contract with an authorized party or to not adhere to the government’s contract award policies.  The practical problem I see is that your client usually won’t even know of the procurement policies until after a default and it’s time to sue.

Stavins provides a useful summary of the implied-in-law contract claim and illustrates how it can serve as a valuable fall-back or Plan B claim in situations where a contract formation defect precludes a breach of express contract action.

The important take-away is that a party who enters a business relationship with a unit of government can still recover for the reasonable value of its services even where it fails to strictly comply with the government contract award policies and procedures.

Land Trust Beneficiary Can Sue On Title Policy; Title Insurer Not An Information Provider Under Economic Loss Rule – IL 2d Dist.

Two key questions the Illinois Second District appeals court asked and answered in Warczak v. Attorneys’ Title Guaranty Fund, Inc., 2015 IL App (2d) 140677-U are (1) whether a land trust beneficiary can sue under a title insurance policy naming the trustee as the covered entity (answer: yes) and (2) if a title insurer that issues a title commitment to a property buyer is in the business of providing information under the negligent misrepresentation exception to the Illinois economic loss rule (answer: no).

The plaintiff bought vacant land in September 2005 (titling it in a land trust; plaintiff was the beneficiary) and the defendant issued a title insurance policy against the property at the same time.  A month earlier (August 2005), the title insurer issued a title commitment that failed to list 2003 taxes as unpaid.  A tax buyer eventually recorded a tax deed against the property in 2008.  When the plaintiff found out, he sued to recover under the title policy.

The plaintiff’s three-count complaint sought a declaratory judgment that he was entitled to title policy coverage and added claims for negligence and breach of contract (alleging breach of the defendant’s sale closing services) against the insurer. The trial court granted the insurer’s motion to dismiss the declaratory action and later entered summary judgment for the insurer on the breach of contract and negligence complaint counts.  Plaintiff appealed.

Partially reversing the trial court, the appeals court addressed legal standing to sue on behalf of a land trust and whether a title commitment provides “information” for the guidance of others sufficient to arm the recipient with a negligent misrepresentation claim against the insurer.

The court reversed dismissal of plaintiff’s declaratory judgment suit and found the plaintiff had standing to sue under the policy as trust beneficiary.  The operative rules relied on by the court included:

– in a land trust (“L-T”), the beneficiary wields broad management power over the property;

– an L-T beneficiary can possess, manage and control the property and also receive income generated from the property;

– the L-T beneficiary maintains all incidents of property ownership except for title to the property (which is held in the name of the Trustee);

– the hallmarks of L-T ownership are (1) secrecy of ownership and (2) ease of property transfer ;

– because of his intimate involvement with the property, the L-T beneficiary has property tax obligations and can pursue litigation affecting the property.

Here, while the trustee was the named title policy insured, it was clear that the parties viewed the plaintiff as the property owner based on their conduct.  In addition, while the plaintiff wasn’t a named insured under the policy, his involvement in the property was so extensive that he was effectively the real party in interest under the title policy.  As a result, the court reversed dismissal of the declaratory judgment suit.  (¶¶ 37-42).

The court did affirm summary judgment for the insurer on the plaintiff’s negligence claim.  The economic loss rule, which prevents a plaintiff from recovering purely economic losses (costs of repair, replacement, lost profits, etc.) in tort (negligence, e.g.) when a contract defines the relationship, defeated the claim.  The governing contract here was the written agent/escrow agreement between the parties.

An exception to the economic loss rule exists where a defendant makes a negligent misrepresentation and is in the business of providing information for the guidance of others in their business dealings.  Following Illinois Supreme Court guidance, the court found that a title insurer who issues a title commitment – as opposed to a title abstract (which does furnish information) – is not in the business of providing information.  This is because a title commitment only specifies what title defects an insurer will not cover; it (the title commitment) limits the risks (of defective title) that an insurer will cover.  (¶¶ 54, 58-59).

In the end, the court found that any information provided by the insurer in the title commitment was ancillary to the sale of title insurance – the main purpose of the parties’ dealings.  Otherwise, the court said, the title insurer would be cast in the role of guarantor of the property’s title condition – something the insurer never signed up for.  ¶ 59.

Take-aways:

1/ L-T beneficiary can sue on title policy naming the trust as insured where beneficiary has hands-on relationship with the property;

2/ The economic loss rule bars negligent misrepresentation claim against title insurer based on title commitment.  This is because title commitment doesn’t provide information.  Instead, it serves to notify an insured (like the plaintiff here) of what defects the insurer is excluding.  Any information is tangential to the main thrust of the contract – to provide insurance over certain title defects.

 

 

 

‘It Seemed Like a Good Idea At The Time’: Revenge Porn In Illinois – A Crime With Myriad Civil Components

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Nation-wide vilification of revenge porn (“RP”) – the unconsented on-line dissemination of sexual photos or images of others (almost always females) – reached an ironic crescendo on Good Friday of 2015 when a California judge  sentenced Kevin Bollaert, 28, proprietor of the UGotPosted.com and ChangeMyReputation.com Websites, to an 18-year prison term after a jury convicted him of identity theft and extortion.1

Mr. Bollaert’s sites allowed users (usually jilted paramours) to post intimate photos of third parties without their permission.  When the terrified photographed party would contact the site to take the images down, Mr. Bollaert would then extract (extort?) a “settlement” payment from the party.

The near two-decades long jail sentence can be viewed as a culmination of cultural outrage at RP as evidenced by a flurry of civil verdicts across the country and (at current writing) 16 state legislatures criminalizing the practice.  Mr. Bollaert’s lengthy punishment, aside from giving him some time to consider “was it worth it?”, may also prove a symbolic harbinger of what’s to come for future RP peddlers.

Hostility toward RP has bled into varied sectors of society.  In the international realm, Great Britain recently (April 2015) criminalized the practice by enacting a law that provides for tough penalties against RP defendants and other nations across the globe are likely to follow suit.2

RP has infiltrated the sports arena, too.  In December of last year, New York Jets linebacker Jermaine Cunningham was arrested and charged after he posted naked photos of his ex-girlfriend on-line and sent them to her family members (ouch!).   Mr.vCunningham pled not guilty in May 2015 to various criminal invasion of privacy charges.3

Most recently, RP hit the news on an astronomical scale as Google, the Web search behemoth, announced it would allow anyone to delete images posted without their permission.4  Social media titans Twitter, Facebook and Reddit followed in Google’s wake and announced similar policies that police the posting of sexually explicit media.5

But while RP’s criminalization garners the most media attention – Illinois’ own statute, which took effect in June 2015, is praised by privacy advocates as particularly robust 6 – RP also gives rise to a plethora of civil causes of action and provides fertile ground for creative lawyering.

This article briefly discusses the various civil claims under Illinois law that are implicated in a case where a defendant – be it an individual or Website owner – posts sexual photos without someone’s consent.

Wikipedia describes RP as “sexually explicit media that is publicly shared online without the consent of the pictured individual.”7  Typically, RP is uploaded by a victim’s ex-partner whose goal is to shame the imaged victim and who sometimes includes the victim’s name, social media links and other identifying information.

Many times, the salacious images are “selfies”, pictures taken by the RP victim.  The harmful impact of RP is (or should be) self-evident: sociologists and psychologists have studied RP recipients and heavily documented the toxic psychological, social and  financial ramifications they suffer.8 

The legal community has also taken notice of RP’s proliferation in this digitally-drenched culture.  Witness international mega-firm K&L Gates’ recent launch of a legal clinic dedicated to helping RP plaintiff’s get legal redress

Civil verdicts

Civil suits against RP defendants appear to be gaining traction.  For just in the past year or so, juries and judges in several states have hit both individual and corporate RP defendants with substantial money judgments.  A California and Ohio court recently socked RP defendants with $450,000 default judgments and civil juries in Florida and  Texas awarded RP plaintiffs $600,000 and $500,000, respectively. 10, 11. 

My research has revealed only a single revenge porn case pending in Illinois, but no published decisions yet. 12

“So What’s A Gal (Almost Always)/Guy To Do?” – Common Law and Statutory Civil Claims

Aside from lodging a criminal complaint, an RP plaintiff has an array of common law and statutory remedies at her disposal.  A brief summary of the salient causes of action under Illinois law that attach to a revenge porn follows.

(1) Invasion of Privacy – Public Disclosure of Private Facts

Illinois recognizes four common-law invasion of privacy torts, those being (1) an unreasonable intrusion upon the seclusion of another; (2) an appropriation of another’s name or likeness; (3) a public disclosure of private facts; and (4) publicity that reasonably places another in a false light before the public. 13

To state a common law claim for invasion of privacy through public disclosure of private facts, a plaintiff must prove: “(1) publicity was given to the disclosure of private facts; (2) the facts were private, and not public, facts; and (3) the matter made public was such as to be highly offensive to a reasonable person.” 14

Generally, to satisfy the publicity element of the tort, a plaintiff must show that the information was disclosed to the public at large; however, the publicity requirement may be satisfied where a disclosure is made to a small number of people who have a “special relationship” with the plaintiff. 15  An invasion of a plaintiff’s right to privacy is important if it exposes private facts to a public whose knowledge of those facts would be embarrassing to the plaintiff.

This might equate to the “general public” if the person is a public figure, or a particular public such as fellow employees, club members, church members, family, or neighbors, if the person isn’t a public figure. 16

Invasion of privacy damages include actual, nominal, and punitive ones. 17

An intrusion on seclusion invasion of privacy plaintiff must show: (1) an unauthorized intrusion or prying into a plaintiff’s seclusion; (2) the intrusion is highly offensive or objectionable to a reasonable person; (3) the matters upon which the intrusion occurred were private; and (4) the intrusion caused anguish and suffering. 17-a

RP Application:  Posting a sexual image on the Internet would qualify as “publicity” and “private” matters under any reasonable interpretation.  And nonconsensual posting would signal highly offensive content to a reasonable person.  The plaintiff’s biggest hurdle would be quantifying his damages in view of the paucity of published RP cases.  But judging from the above default and jury awards, damages ranging from $450,000-$600,000 don’t seem to shock the court’s conscience.  In addition, an intrusion on seclusion claim could fail if the RP case involved a selfie – since that would seem to defeat the “private” and “seclusion” elements of the tort.

(2) Illinois Right of Publicity Act (the “IRPA”)

In 1999, IRPA replaced the common law misappropriation of one’s likeness – the second (2) above branch of the four common-law invasion of privacy torts outlined above.  Illinois recognizes an individual’s right to “control and to choose whether and how to use an individual’s identity for commercial purposes.” 18  The right of publicity derives from the right to privacy  and is “designed to protect a person from having his name or image used for commercial purposes without (her) consent.” 19

“Commercial purpose” under the IRPA means the public use or holding out of an individual’s identity (i) on or in connection with the offering for sale or sale of a product, merchandise, goods, or services; (ii) for purposes of advertising or promoting products, merchandise, goods, or services; or (iii) for the purpose of fundraising. 20 “Identity” means “any attribute” of a plaintiff including a photograph or image of the person. 21

Plaintiff must prove revenue that a defendant generated through the use of Plaintiff’s image.  Failing that, plaintiff can recover statutory damages of  $1,000. 22.  An IRPA plaintiff can also recover punitive damages and attorneys’ fees. 23.

RP Application: RP fits snugly within IRPA’s coverage.  It specifically applies to photographs or images.  If the RP defendant was making money off the unconsented Web postings, and IRPA claim could prove both a viable and valuable claim that would allow the plaintiff to recover statutory damages and attorneys’ fees.

(3), (4) Intentional and Negligent Infliction of Emotional Distress

“To prove a cause of action f0r intentional infliction of emotional distress, the plaintiff must establish three elements: (1) extreme and outrageous conduct; (2) intent or knowledge by the actor that there is at least a high probability that his or her conduct would inflict severe emotional distress and reckless disregard of that probability; and (3) severe emotional distress.” 24

A negligent infliction of emotional distress plaintiff must plead and prove the basic elements of a negligence claim: a duty owed by the defendant to the plaintiff, a breach of that duty, and an injury proximately caused by that breach. 25  A bystander negligent infliction plaintiff must prove a physical injury or illness resulting from the conduct. 26  

Since literally millions consume social media on a daily basis (27), perhaps it’s not a stretch to see a bystander make out a negligent infliction claim based on RP aimed at a bystander’s close relative for example.

RP Application  Under prevailing social mores, posting sexually explicit media    designed to shame someone or to extract money from them would likely meet the objectively extreme and outrageous test.  The intent or reckless disregard element would likely be imputed to a defendant by virtue of him publicizing the offending material.  The unanswered questions would be damages.  Putting it rhetorically, how would you (judge or jury) compensate the RP where there is no precise numerical formula?

(5) Copyright Infringement

Copyright infringement as applied to the RP setting represents a creative – and some way the best – way to attack RP.  28  The Federal copyright scheme particularly fits a RP situation involving “selfies” – which, by some accounts, make up nearly 80% of RP claims. 29

Copyright law gives an owner the exclusive rights – among others – to duplicate and exhibit a work.  Copyright protection exists for any work fixed in a tangible medium and includes photographs and videos. 30  The copyright infringement plaintiff must establish (1) she owns the copyright in the work; and (2) the defendant copied the work without the plaintiff’s authorization.18  Inputting a copyrighted work onto a computer qualifies as “making a copy” under the Copyright Act. 31

The catch here is that formally registering the work is a precondition to filing suit for infringement. 32

Being able to sue a defendant for copyright infringement is obviously an important right since that is copyright law’s “teeth”: a winning copyright plaintiff can recover statutory damages, actual damages plus attorneys’ fees. 33

But it begs the question – is it realistic that an RP plaintiff is going to draw more attention to a salacious photo by registering it with a Federal government agency?  Not likely.  Nevertheless, a copyright claim could lie for RP conduct involving a plaintiff’s selfies if she registered them with the US Copyright office.

What about the CDA (Communications Decency Act)?

Another important consideration in the RP calculus involves Section 230 of the Communications Decency Act (“CDA”) – a statute on which much electronic “ink” has spilled and that is beyond the scope of this article.  34  Basically, as I understand it, the CDA immunizes Web service providers (Comcast, AOL, etc.) from a third-party’s publication of offensive content but not Web content providers.  35  So the CDA inquiry distills to whether a Website defendant is a service provider (in which there would be immunity) or content provider (in which case there wouldn’t be).36.

(6) Negligence

A common law negligence action against an RP spreader constitutes another creative adaptation of a tried-and-true cause of action to a decidedly post-modern tort (and crime).  An Illinois, a negligence plaintiff must plead and prove (1) the defendant[s] owed a duty of care; (2) the defendant[s] breached that duty; and (3) the plaintiff’s resulting injury was proximately caused by the breach. 37

The plaintiff would have to prove that the RP defendant owed a duty of care not to post and distribute intimate images of the plaintiff, that the defendant breached the duty by indiscriminately posting the image, and that plaintiff suffered injury as a proximate cause.

Like the privacy torts encapsulated above, the key questions seem to be causation and damages.  That is – what numerical damages can the RP plaintiff establish that are traceable to the illicit (electronic) is is  publication?  Conceivably, she could request lost wages, medical and psychological treatment costs, pain and suffering, loss of a normal life, etc. – the entire gamut of damages a personal injury plaintiff can seek.

Afterwords:

RP is a subject whose contours seem to be in perpetual flux as the law is fluid and still developing.  In fact, by the time this article is published, it’s possible that there will be a flurry of legislative, political and even case law developments that make some of the contents dated.

That said, as on-line privacy issues and social media use continue to pervade our culture and expand on a global level, and as publishers of private, salacious photographs aren’t learning their collective lesson, RP will likely secure its foothold in cyberlaw’s criminal and civil landscapes.

The above is not an exclusive list of potential revenge porn causes of action.  As states (and countries) continue to enact laws punishing RP, it’s likely that civil damage claims attacking the practice will mushroom in lockstep with RP’s rampant criminalization.

References:

1. http://www.nbcsandiego.com/news/local/Kevin-Bollaert-Revenge-Porn-Sentencing-San-Diego-298603981.html

2. http://www.independent.co.uk/news/uk/home-news/revenge-porn-illegal-in-england-and-wales-under-new-law-bringing-in-twoyear-prison-terms-10173524.html

3. http://www.msn.com/en-us/sports/nfl/nfl-linebackers-case-highlights-rise-of-revenge-porn-laws/ar-BBj8sP9

4.  http://bigstory.ap.org/article/ff3b7f7b697b4af295935ed6a482ca1e/google-cracks-down-revenge-porn-under-new-nudity-policy

5. http://www.huffingtonpost.com/mary-anne-franks/how-to-defeat-revenge-porn_b_7624900.html

6. http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=098-1138 (text of Illinois’ revenge porn law, eff. 6.1.15)

7. https://en.wikipedia.org/wiki/Revenge_porn

8.  http://www.huffingtonpost.com/mary-anne-franks/how-to-defeat-revenge-porn_b_7624900.html

9.  http://dealbook.nytimes.com/2015/01/29/law-firm-founds-project-to-fight-revenge-porn/?_r=0

10. http://arstechnica.com/tech-policy/2015/03/revenge-porn-creepsters-ordered-to-pay-900000-in-default-judgment

11. http://www.brownanddoherty.com/florida-jury-delivers-record-setting-600000-00-verdict-in-revenge-porn-case.php; http://www.houstonchronicle.com/news/houston-texas/houston/article/Jury-awards-500-000-in-revenge-porn-lawsuit-5257436.php6.

12. http://articles.redeyechicago.com/2014-03-11/news/48127548_1_hunter-moore-mary-anne-franks-legislators

13.  Ainsworth v. Century Supply Co., 295 Ill.App.3d 644, 648, 230 Ill.Dec. 381, 693 N.E.2d 510 (1998).

14-16.  Miller v. Motorola Inc., 202 Ill.App.3d 976, 978, 148 Ill.Dec. 303, 560 N.E.2d 900, 902 (1990), citing W. Keeton, Prosser & Keeton on Torts § 117, at 856–57 (5th ed.1984)

17.  Lawlor v. North American Corporation, 2012 IL 112 530, ¶¶ 58-65

17-a.  Huon v. Breaking Media, LLC, 2014 WL 6845866 (N.D.Ill. 2014) 

18-19. Trannel v. Prairie Ridge Media, Inc., 2013 IL App (2d) 120725, ¶¶ 15-16

20. 765 ILCS 1075/1.

21. 765 ILCS 1075/5

22. 765 ILCS 1075/40(a)(2)

23. 765 ILCS 1075/40(b)

24. Doe v. Calumet City, 161 Ill.2d 374 (1994)

25-26.  Rickey v. CTA, 98 Ill.2d 546 (1983)

27.  http://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/ (Facebook has 1.44B users; Twitter has 236M; Instagram – 300M)

28-29. http://www.washingtonpost.com/news/the-intersect/wp/2014/09/08/how-copyright-became-the-best-defense-against-revenge-porn/

30-31: In re Aimster Copyright Litigation, 343 F.3d 643 (7th Cir. 2003)

32.  17 U.S.C. § 1104

33.  http://copyright.gov/circs/circ01.pdf

34.  https://www.law.cornell.edu/uscode/text/47/230

35.  http://www.defamationremovallaw.com/what-is-section-230-of-the-communication-decency-act-cda/

36.  Zak Franklin, Justice for Revenge Porn Victims: Legal Theories to Overcome Claims of Civil Immunity by Operators of Revenge Porn Websites, 102 Cal. L. Rev. 1303 (Oct. 2014).                               

37. Corgan v. Muehling, 143 Ill.2d 296, 306 (1991)

 

The (Ruthless?) Illinois Credit Agreements Act

The Illinois Credit Agreements Act, 815 ILCS 160/1, et seq. (the “ICAA”) and its requirement that credit agreements be in writing and signed by both creditor and debtor, recently doomed a borrower’s counterclaim in a multi-million dollar loan default case.

The plaintiff in Contractors Lien Services, Inc. v. The Kedzie Project, LLC, 2015 IL App (1st) 130617-U, sued to foreclose on a commercial real estate loan and sued various guarantors along with the corporate borrower.

The borrower counterclaimed, arguing that a “side letter agreement” (“SLA”) signed by an officer of the lender established the parties’ intent for the lender to release additional funds to the borrower – funds the borrower claims would have gotten it current or “in balance” under the loan. The trial court disagreed and entered a $14M-plus judgment for the lender plaintiff.  The corporate borrower and two guarantors appealed.

Held: Affirmed

Rules/Reasoning:

The ICAA provides that a debtor cannot maintain an action based on a “credit agreement” unless it’s (1) in writing, (2) expresses an agreement or commitment to lend money or extend credit or (2)(a) delay or forbear repayment of money and (3) is signed by the creditor and the debtor. 815 ILCS 160/2

An ICAA “credit agreement” expansively denotes “an agreement or commitment by a creditor to lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes, and not in connection with the issuance of credit cards.”  So, the ICAA does not apply to consumer transactions.  It only governs business/commercial arrangements.

The ICAA covers and excludes claims that are premised on unwritten agreements that are even tangentially related to a credit agreement as defined by the ICAA.

The borrower argued that the court should construe the SLA with the underlying loan as a single transaction: an Illinois contract axiom provides that where two instruments are signed as part of the same transaction, they will be read and considered together as one instrument.

The court rejected this single transaction argument.  It found the SLA was separate and unrelated to the loan documents.  The SLA post-dated the loan documents as evidenced by the fact that the  SLA specifically referenced the loan.  Conversely, the loan made no mention of the SLA (since it didn’t exist when the loan documents were signed).

All these facts militated against the court finding the SLA was part-and-parcel of the underlying loan transaction.

Another key factor in the court’s analysis was the defendants admitting that the SLA post-dated the loan (and so was a separate and distinct writing).  The court viewed this as a judicial admission – defined under the law as “deliberate, clear, unequivocal statement by a party about a concrete fact within that party’s knowledge.”

Here, since the SLA was not part of the loan modification, it stood or fell on whether it met the requirements of the ICAA.  It did not since it wasn’t signed by both lender and borrower.  The ICAA dictates that both creditor and debtor sign a credit agreement.  Here, since the debtor didn’t sign the SLA (it was only signed by lender’s agent), the SLA agreement was unenforceable.  As a consequence, the lender’s summary judgment on the counterclaim was proper.

Afterwords:

This case and others like it show that a commercially sophisticated borrower – be it a business entity or an individual – will likely be shown no mercy by a court.  This is especially true where there is no fraud, duress or unequal bargaining power underlying a given loan transaction.

Contractor’s Lien Services also illustrates in stark relief that ICAA statutory signature requirement will be enforced to the letter.  Since the borrower didn’t sign the SLA (which would have arguably cured the subject default), the borrower couldn’t rely on it and the lender’s multi-million dollar judgment was validated on appeal.

Commercial Real Estate Broker’s Judgment Against Property Owner Upheld Where Owner Negotiated Deal Behind Broker’s Back

In AMA v. Kaplan Realty, Inc., 2015 IL App(1st) 143600, the court looked to the common dictionary definitions of “exclusive” and “refer” as they apply to an exclusive real estate listing agreement to find that a commercial real estate broker could recover unpaid commissions from a property owner who negotiated a property sale without the broker’s knowledge.

Here is the relevant chronology: the plaintiff property owner hired the defendant broker to sell a multi-unit apartment building.  The parties signed an exclusive listing agreement running from January 2009 – January 2010 that required the owner to refer all purchase inquiries to the broker and that provided for a 5% commission on the gross sale price from any buyer during the term of the agreement.

About two months before the agreement expired, the owner started dealing directly with a prospective buyer whom the broker had earlier introduced to the owner. The owner and buyer continued to discuss the details of the purchase through the end of the contractual listing period.  Ultimately, some 18 days after the agreement expired, the owner and buyer signed a $6.75M sales contract for the parcel.  After learning of the sale, the broker recorded a lien for 5% of the sale price.

The plaintiff filed a slander of title suit (arguing that the broker lien clouded property title) and the broker filed a breach of contract counterclaim for his 5% commission.

The trial court entered summary judgment for the broker for nearly $500K and the owner appealed.

Affirming, the First District rejected the owner’s argument that since the broker “knew about” the property’s eventual buyer, the owner complied with the listing contract.  The court noted that the contract required the owner to “immediately refer” any prospect who contacted the owner for any reason and there was no exception for prospects known to the broker.

Looking to the Merriam-Webster’s College Dictionary, 11th edition (“MWCD”) “refer” means “to send or direct for treatment, air or information, or decision.”  Under this definition, the owner was obligated to send anyone who contacted the owner about the property to the broker.  MWCD, p. 1045, 11th ed. 2006.

The court also noted that the listing agreement was an exclusive one.  “Exclusive” in the listing contract context denotes “limiting or limited to possession, control or use by a single individual or group.”  MWCD, p. 436 (11th ed. 2006).  Under this definition, the court found that the subject listing agreement gave the broker the sole right to market the property – even to the exclusion of the owner.

Affirming the money judgment for the broker, the court found that the owner’s sustained pattern of excluding the broker from communications with the buyer and failing to apprise the broker of the owner’s contacts with the buyer supported the trial court’s half-million dollar judgment for the broker.

Afterword:

This case represents a straightforward application of contract interpretation principles to merit what the court believes is a fair result for the broker.  The owner’s pattern of bypassing the broker to contact the buyer directly, coupled with the fact that the purchase contract was signed so soon after the listing agreement terminated was a suspicious factor weighing in favor of upholding the money judgment against the owner.

I’m left wondering why the broker didn’t file suit to foreclose his broker’s lien.  As I’ll write in a future post, the Illinois Commercial Real Estate Broker Lien Act, 770 ILCS 15/1 et seq. (“Broker Act”), arms a commercial broker who secures a buyer (or tenant) but isn’t paid with a strong remedy.  The successful Broker Act plaintiff can recover her attorneys’ fees against the owner or buyer, whatever the case may be. 770 ILCS 15/5, 10, 15.

 

Sole Shareholder Of Dissolved Corporation Can Sue Under Nine-Year Old Contract – Eludes Five-Year ‘Survival’ Rule

image

 

Haskins, d/b/a Windows Siding Unlimited, Inc. v. Hogan, 2015 IL App (3d) 140609-U – A Synopsis

In 2003, Plaintiff’s former company entered into a written contract with defendant to install windows on defendant’s home. Defendant failed to pay.

The windows company was administratively dissolved in 2005 by the Illinois Secretary of State.  Seven years later, in 2012, Plaintiff – the sole shareholder of the windows company – assigned the company’s claim against the defendant to himself and sued defendant for breach of contract.

The court granted the defendant’s motion for summary judgment and found that the claim was untimely under Illinois’ five-year survival period for a dissolved corporation’s claims.  Plaintiff appealed.

Reversing the trial court, the appeals court first noted that a dissolved corporation’s assets belong to the former shareholders, subject to the rights of creditors.

Section 12.80 of the Business Corporation Act provides that an administrative dissolution of a company does not take away or effect any civil remedy belonging to the corporation, its directors, or shareholders, for any pre-dissolution claim or liability.

The lone limitation on this rule is that suit must be filed on the pre-dissolution claim within five years of the dissolution date. 805 ILCS 5/12.80.

This five-year “survival period” represents the outer limit for lawsuits by or against dissolved corporations.  The purpose of the five-year survival period is to allow the corporation to wrap up its affairs.  The court clarified that the five-year time span applies both to voluntary and involuntary dissolutions.

There are two exceptions to the five-year rule that allow a shareholder to file suit outside the five-year period.  They are: (1) where the shareholder is a direct beneficiary of the contract; and (2) where the shareholder seeks to recover a fixed, easily calculable sum.  (¶ 17).

To meet the first exception, the shareholder must show the parties manifested an intent to confer a benefit on the third party/shareholder. Here, this first exception didn’t apply since there was nothing in the contract suggesting an intent to benefit the plaintiff individually: the windows contract was clearly between a corporate entity (the windows company) and the defendant.

The second exception did apply, however.  The contract was for a fixed sum – $5,070.  As a result, the court found the 10-year limitations period for breach of written contracts applied (instead of the 5-year survival statute) and the plaintiff’s suit was timely (he sued in 2012 for a 2003 breach – within 10 years.) (¶¶ 17-20); 735 ILCS 5/13-206.

Comments: An interesting application of the five-year corporate survival rule to the small claims context.  It appears to be wrongly decided though.  The plaintiff clearly didn’t establish the first exception to the five-year rule: that he was a third-party beneficiary of the 2003 windows contract.  Since he failed to establish both exceptions, the five-year rule should have applied and time-barred the plaintiff’s claim.

Maybe it’s because the plaintiff was the sole shareholder of the defunct corporation that the court collapsed the two exceptions.  Regardless, it remains to be seen whether this decision is corrected or reversed later on.

Facebook Posts Not Hearsay Where Offered To Show How Ex-Wife Presented Relationship To Others – Illinois Case Note

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Reversing a family law judge’s decision to terminate ex-spousal maintenance, the Second District appeals court in In re Marriage of Miller, 2015 IL App(2d) 140530 delves into the foundation requirements for getting Facebook pages into evidence and again highlights the crucial role social media plays in litigation in this digitally saturated culture.

The trial court granted the ex-husband (“Husband”) motion to terminate maintenance payments to his ex-wife (“Wife”) based on her multiple Facebook posts that she was in a relationship and (presumably) living with another man.  Illinois divorce law posits that maintenance payments must cease when the recipient remarries or cohabitates with another on a continuing basis.

Since the Facebook posts revealed the Wife frequently trumpeting her new relationship, the court found that the policies behind maintenance payments would be compromised by allowing the Wife to continue receiving payments from Husband.

The Wife appealed, arguing that the trial court shouldn’t have allowed her Facebook posts into evidence.

Held: Reversed (but on other grounds).  Wife’s social media posts were properly authenticated, not hearsay and any prejudice to her didn’t substantially outweigh the posts’ probative value.

Rules/reasoning:

– To enter a document into evidence at trial or on summary judgment, the offering party must lay a foundation for it;

– The party offering the document into evidence – including a document to impeach (contradict) a witness on the stand – must authenticate the document through the testimony of a witness who has personal knowledge sufficient to satisfy the court that the document is what the proponent claim it is;

– To lay a foundation for an out-of-court statement (including a document), the party attempting to get the statement into evidence must direct the witness to the time, place, circumstances and substance of the statement;

– Hearsay is a statement, other than made by the declarant while testifying at trial or hearing, offered in evidence to prove the truth of the matter asserted;

– When the making of statement is the significant fact, hearsay isn’t involved (ex: the mere fact that a conversation took place isn’t hearsay);

Here, the court found that the Facebook posts weren’t offered for their truth.  Instead, they were offered to illustrate the way the Wife was portraying her current relationship to others.  The court deemed the posts relevant to the issue of how “public” or “out in the open” the Wife was about the relationship. 

And since the Husband didn’t offer the posts for the truth of their contents (that Wife was in fact living with someone and so disqualified from further maintenance payments) but instead to show the court the manner in which the Wife presented the relationship to others, the court properly allowed the posts into evidence.

The Second District also agreed with the trial court that the posts didn’t unfairly prejudice the Wife.  Indeed, the court characterized the posts as “bland”, “cumulative” and less effective than the parties’ live testimony.

(¶¶ 33-38)

The Wife still won though as the appeals court reversed the trial court’s decision to terminate Husband’s maintenance obligations.  The court found that more evidence was needed on the specifics of the Wife’s existing relationship including whether it was continuing and conjugal enough to constitute a “de facto marriage” (as opposed to a “dating” relationship only) and thus exclude the Wife from further maintenance payments from Husband.

Take-aways:

Hearsay doesn’t apply where out-of-court statement has independent legal significance;

Facebook posts authored by a party to lawsuit will likely get into evidence unless their prejudice outweighs their probative value;

Where social media posts are authored by third parties, it injects another layer of hearsay into the evidence equation and makes it harder to get the posts admitted at trial.

Fraud, Economic Loss and Contractual Integration Clauses (And More): Illinois Fed Court Provides Primer

Plaintiff purchased the defendant’s nation-wide network of auto collision centers as part of a complicated $32.5M asset purchase agreement (APA).   A dispute arose when the plaintiff paid $9.5M to a paint supply company and creditor of the defendant in order to consummate the APA.  The plaintiff argued that the defendant breached the APA by not satisfying the paint supply debt and securing a release from the paint supplier before the APA’s closing date.  Plaintiff sued on various tort and contract theories.  Defendant countersued for reformation, rescission and breach of contract.  Both parties moved to dismiss.

In granting the bulk of the defendant’s motion to dismiss, the court in Boyd Group, Inc. v. D’Orazio, 2015 WL 3463625 (N.D.Ill. 2015) examines the interplay among several recurring commercial litigation issues including the economic loss doctrine as it applies to negligent misrepresentation claims, the impact of a contractual integration clause, and the pleading requirements for fraud in Illinois.

The court dismissed the breach of contract claim based on the APA’s integration clause.  Where parties insert an integration clause into their contract, they are manifesting their intent to guard against conflicting interpretations that could result from extrinsic evidence.  If a contract has a clear integration clause, the court cannot consider anything beyond the “four corners” of the contract and may not address evidence that relates to the parties’ understanding before or at the time the contract was signed.1

Here, the plaintiff’s breach of contract claim was based in part on e-mails authored by the defendant the same day the APA was signed.  Since the APA integration clause clearly provided that the APA was constituted the entire agreement between the parties, the court found that the defendant’s e-mails couldn’t be considered to vary the plain language of the APA.2.

The plaintiff’s negligent misrepresentation claim was defeated by the economic loss doctrine, which posits that where a written contract governs the parties’ relationship, a plaintiff’s remedy is one for breach of contract, not one sounding in tort.  An exception to this rule is where the defendant is in the business of providing information for the guidance of others in their business transactions.

Case law examples of businesses that the law deems information suppliers (for purposes of the negligent misrepresentation/economic loss rule) include stockbrokers, real estate brokers and terminate inspectors.  Conversely, businesses whose main product is not information include property developers, builders and manufacturers.

Here, the in-the-business exception (to the economic loss rule) didn’t apply since defendant operated car collision repair businesses.  He did not supply information for others’ business guidance.  The court found the defendant more akin to a manufacturer of a product and that any information he furnished was ancillary to his main collision repair business.3

The one claim that did survive the motion to dismiss was plaintiff’s fraud claim.  To plead common law fraud under Illinois law, the plaintiff must establish (1) a false statement of material fact, (2) defendant’s knowledge the statement was false, (3) defendant’s intent to induce action by the plaintiff, (4) plaintiff’s reliance on the truth of the statement, and (5) damages resulting from reliance on the statement.  Fraud requires heightened pleading specificity and it must be more than a simple breach of contract.  A fraud claim must also involve present or past facts; statements of future intent or promises aren’t actionable. 4

The plaintiff’s complaint allegations that the defendant factually represented to the plaintiff that he was in the process of securing the release of the paint supply contract as an inducement for plaintiff to enter into the APA were sufficiently factual to state a fraud claim under Federal pleading rules.

Afterwords:

  • The economic loss rule bars negligent misrepresentation claim where the defendant’s main business is providing a tangible product rather than information;
  • A clearly drafted integration clause will prevent a party to a written contract from introducing evidence (here, emails) that alters a contract’s plain meaning;
  • The failure of a condition precedent won’t equate to a breach of contract where the party being sued isn’t responsible for the condition precedent;
  • A plaintiff successfully can plead fraud where it involves a statement concerning a present or past fact, not a future one.

References:
1.  2015 WL 3463625, * 7

2. Id.

3. Id. at * 11

4. Id. at **8-9

 

 

Illegality Defense Doesn’t Defeat HVAC Subcontractor’s Damage Claim Versus General Contractor on Chicago Transit Authority Project (N.D. 2015)

I’ve written before on the illegality defense to breach of contract suits.  It’s bedrock contract law that an agreement to do something criminal (example – murder, arson, selling drugs, etc.) is unenforceable against the person who doesn’t perform (example: if I fail to pay a hit man, he can’t sue me for the $). 

The illegality defense also applies in the civil context where it can defeat an agreement that runs afoul of a State or Federal statute.  The policy underpinning for the illegality rule is that it would make a mockery of the justice system if you could sue to enforce an agreement to commit a crime.

Energy Labs, Inc. v. Edwards Engineering, 2015 WL 3504974 (N.D.Ill. 2015) examines contractual illegality in the context of a high-dollar subcontract to supply HVAC equipment to the Chicago Transit Authority (CTA).

The plaintiff air conditioning parts subcontractor was hired by the defendant to provide parts in connection with the defendant’s contract with the CTA.  When the defendant found out that plaintiff was procuring its parts in a foreign country, it cancelled the contract since the Buy America Act, 49 U.S.C. s. 5323 (“BAA”) required the parts used in the CTA project to be made in the U.S.

Plaintiff sued to recover damages resulting from the defendant’s contract cancellation since plaintiff had already designed and started making the HVAC parts.  Defendant moved to dismiss on the basis that the contract was illegal since it violated the BAA.

The court denied the motion to dismiss.  While the general rule is that a contract that violates a Federal statute is normally unenforceable, the court said the rule isn’t automatic.  Instead, the court considers the “pros and cons” of enforcing the putative illegal contract taking into account the benefits of upholding the contract against the drawbacks of doing so.

Even if a contract isn’t illegal, a Federal court can still refuse to enforce it when doing so would violated a clear congressional goal or policy. 

Illegality also applies where a contract isn’t illegal on its face but requires a contracting party to commit an illegal act carrying out its obligations. 

To determine whether a contract violates a Federal statute, the court compares the four-corners of the contract to the statutory text and any interpreting case law.(*3).

Here, the court found that the contract wasn’t explicitly illegal.  The purchase orders submitted by the general contractor defendant didn’t require it to pay for plaintiff’s services with Federal funds.  The defendant was free to pay the plaintiff with its own funds; not the government’s. 

In addition, the BAA doesn’t outlaw the sale of all foreign-made air conditioning units to government agencies like the CTA.  It instead only applies to projects that are paid for at least in part with Federal funds.  As a consequence, the contract wasn’t illegal on its face.

Next, the court rejected the defendant’s argument that allowing plaintiff to enforce the contract violated public policy.  In the procurement contract context, where there is a mandatory contract term that is based on a strong Federal policy, this policy is read into the contract by operation of law. 

However, this so-called Christian doctrine1 only applies to parties that contract directly with the government; not to subcontractors like the plaintiff.  This is because subcontractors contract with general contractors, not with the government. 

To impose a Federal procurement edict on a subcontractor who often doesn’t even know he is contracting for government work is plainly unfair. (*5).

Afterword:

An interesting discussion of the illegality defense in somewhat arcane context of Federal procurement rules.  The court gave a constricted reading to the illegality rule and looked at the underlying fairness if the contract was defeated. 

The fact that the plaintiff performed extensive work before termination figured heavily in the court’s analysis.  Another key ruling is that only general contractors, not subcontractors like the plaintiff here, have the duty to inquire into applicable procurement requirements.

————————————————————————————–

1.  G.L. Christian and Associates v. United States, 312 F.2d 418 (1963).

Contractor’s Legal Malpractice Suit Can Go Forward In Case of (Alleged) Misfiled Mechanics’ Lien: IL 1st Dist.

Construction Systems, Inc. v. FagelHaber LLC, 2015 IL App (1st) 141700, dramatically illustrates the perilous consequences that can flow from a construction contract’s failure to identify the contracting parties and shows the importance of clarity when drafting releases intended to protect parties from future liability.

The plaintiff contractor sued its former law firm (the Firm) for failing to properly perfect a mechanics lien against a mortgage lender on commercial property.  The plaintiff alleged that because of the Firm’s lien perfection failure, the plaintiff was forced to settled its claim for about $1.3M less than the lien’s worth (about $3M). 

In the underlying lien case, the plaintiff and defendant Firm got into a fee dispute and the Firm withdrew.  The Firm turned over its file to the plaintiff after the plaintiff made a partial payment of the outstanding fees (owed to defendant Firm) and signed a release (the “Release”). The Release, which referenced “known and unknown” claims and contained “without limitation” verbiage, was signed by the plaintiff in 2004.  Plaintiff filed the current malpractice suit in 2009.

The trial court entered summary judgment for the Firm on the basis that the Release immunized the Firm from future claims.  Plaintiff appealed.

Held: Reversed

Rules/Reasons:

Reversing summary judgment for the Firm, the First District first applied the relevant rules governing written releases in Illinois.

– a release is a contract and is governed by contract law;

– a release will be enforced as written where it’s clearly worded

– the scope and effect of a release is controlled by the intention of the parties;

– the intention of the parties is divined by reference to the words of the release and a release won’t be construed to defeat a claim that was not contemplated by the parties when they signed it;

– A “general” release will not apply to specific claims where a party is unaware of other (specific) claims;

– Where one party to a release owes the other a fiduciary duty (e.g. lawyer-client), the party owing the fiduciary duty has the burden of showing that it disclosed all relevant information to the other party.

(¶¶ 25-28).

Here, the court gave the Release a cramped construction.  It held that it didn’t apply to the malpractice suit since that case wasn’t filed until 5 years after the Release was signed and there was no evidence that the plaintiff knew that the Firm possibly flubbed the lien filing when it (the plaintiff) signed the Release.  This lack of evidence on the parties’ intent raised a disputed fact question that required denial of summary judgment.

Next, the court turned to the Firm’s judicial estoppel argument – that the plaintiff couldn’t sue for malpractice since it obtained a benefit in the underlying lawsuit (a settlement payment of $1.8M from the competing lender) by claiming it was an original contractor and not a subcontractor.  Judicial estoppel applies where (1) a party takes two positions under oath, (2) in separate legal proceedings, (3) the party successfully maintained the first position and obtained a benefit from it; and (4) the two positions are inconsistent.  (¶ 37).

The issue was paramount to the underlying lien case because if the plaintiff was a subcontractor, it had to comply with the 90-day notice requirement of Section 24 of the Lien Act.  But if it was a general or original contractor, plaintiff was excused from the 90-day notice requirement.  Based on this factual uncertainty, the court found the plaintiff had a right to pursue alternative arguments to salvage something of its approximately $3M lien claim.

The court also agreed with the plaintiff that it could recover prejudgment interest on the legal malpractice claim.  Since that claim flowed from the underlying allegation that the Firm failed to perfect plaintiff’s lien, and since Section 21 of the Illinois Mechanics Lien Act allows for prejudgment interest (770 ILCS 60/21), the plaintiff could add the interest it would have recovered to the damage claim versus the Firm. (¶ 48).

Afterwords:

1/ A broad release can still be narrowly interpreted to encompass only those claims that were likely in the release parties’ contemplation.  If a claim hadn’t come to fruition at the time a release is signed, the releasing party can argue that an expansive release doesn’t cover that inchoate claim;

2/ Judicial estoppel requires more than alternative pleadings or arguments.  Instead, the litigant must take two wholly contradictory statements and obtain a benefit from doing so.  What’s a “benefit” is open to interpretation.  Here, the plaintiff received $1.8M on its lien claim in the earlier litigation.  Still, this wasn’t a benefit in relation to the value of its lien – which exceeded $3M;

3/ If the underlying claim – be it common law or statutory – provides for pre-judgment interest, then the later malpractice suit stemming from that underlying claim can include pre-judgment interest in the damages calculation.

 

 

Company’s Fraud Suit Versus Rival’s Ex-CFO Defeated by Prior Arbitration Award: Illinois Res Judicata Basics

The privity element of the res judicata doctrine focuses on whether two parties to two separate lawsuits have legal interests that are so intertwined they should be treated as the same parties.  Privity is usually an easier question than the res judicata’s other well-settled components – whether the two cases stem from the same transaction and whether that first case was resolved via a final judgment on the merits.

In Alaron Trading Co. v. Hehmeyer, 2015 IL App (1st) 133785-U, the First District examines res judicata’s privity element through the lens of a trading firm suing an officer of a rival company for stealing clients and not paying referral fees where that rival previously won an arbitration award against the trading firm for breach of contract.

Facts and Chronology: In 2012, the corporate officer defendant’s former company won a $400,000 arbitration award against the plaintiff trading firm for prematurely terminating a year-long trading contract.  Several months after the arbitration award, the trading firm sued the corporate officer in state court for fraud and tortuous interference. The trial court granted defendant’s Section 2-619 motion, premised on res judicata.

Held: Affirmed.

Rules/Reasons:

– A motion under Code Section 2-619(a)(4) is the proper section to bring a res judicata motion;

– Res judicata requires an “identity of cause of action” between two separate legal proceedings (here, an arbitration case followed by a later court case);

– Res judicata can bar a defendant in one case from filing claims in a second case where the second case claims are based on the same facts as the plaintiff’s first case allegations.

– Separate claims are considered the same for res judicata purposes where they arise from a single group of operative facts, even though the causes of action are titled differently;

– Res judicata not only bars claims that were brought in an earlier case/arbitration, but also claims that could have been brought;

– Res judicata also requires “privity” between parties to two separate proceedings.  Privity applies where two parties are different in name but whose legal interests are substantially aligned such that an adjudication of one party’s rights in an earlier case will bind the second party in the second case;

– Quintessential privity relationships include members of partnerships and corporation and their officers, directors and shareholders;

(¶¶46-49, 56).

Here, all res judicata grounds were present.  The defendant in the state court case was the ex-CEO of the prior arbitration plaintiff.  In addition, the state court plaintiff (the trading firm and arbitration defendant) filed a voluminous counterclaim in the arbitration that was based primarily on the (state court) defendant’s conduct and that stemmed from the same underlying facts as the state court complaint.

Given his former CEO status, the defendant’s interests neatly aligned with those of his former employer – the arbitration plaintiff.  And since the court found that the state court plaintiff could have filed counterclaims against the defendant CEO in the earlier arbitration, res judicata applied and defeated plaintiff’s current court action.

Afterwords:

The lesson of this case is to file all possible claims against all possible parties that stem from the same underlying facts.  This is especially urgent where it looks like there is a possibility of multiple proceedings: that is, where successive lawsuits (or arbitrations) could be filed.  Otherwise, by holding back on claims in a prior case, a litigant could be foreclosed from filing claims in a second suit.

Contractor’s Substantial Performance Of Home Repair Work Defeats Homeowners’ Breach of Contract Suit – IL 5th Dist.

Brown v. Daech & Bauer, 2015 IL App (5th) 140203-U, serves as a recent example of a court applying the substantial performance doctrine in favor of a contractor in a disgruntled homeowner’s breach of contract suit versus the contractor.

The homeowner plaintiffs sued the contractor for defective work on plaintiffs’ home after some hail damage.  The plaintiffs joined statutory claims for violation of the Home Remodeling and Repair Act (HRRA) and the Consumer Fraud Act (CFA) in their complaint.

For its part, the contractor counterclaimed for monies withheld by the plaintiff.  After a bench trial, the lower court sided with the contractor and awarded it damages.  It ruled against the plaintiffs on all claims.

 The 5th District affirmed and in doing so, gives some content to both the substantial performance and partial performance doctrine under Illinois contract law.

In Illinois, contractors aren’t required to perform with surgical precision.  Instead, contractors only need to exhibit the “honest and faithful performance of the material and substantial parts of the contract with no willful departure from or omission of the essential terms of the contract.” This is the substantial performance doctrine.

Like most legal tests, the substantial performance one is fluid and fact-based.  A contractor can meet the standard even where there are some defects, deviations or omissions from the contract.  So long as the project’s structural integrity remains intact and any contractual deviations can be fixed without damaging the property, the contractor can likely show substantial performance and recover under the contract.  The homeowner’s recourse when faced with a substantially (as opposed to perfectly) performing contractor is to take a credit against the contract price for any defects in the contractor’s work.

The appeals court agreed with the trial court’s finding that the plaintiff met the substantial performance standard. Since this finding wasn’t against the manifest weight of the evidence (“unreasonable, arbitrary, not based on the evidence”), the judgment for the contractor was upheld.

The court also found that the contractor could recover under the related doctrine of partial performance. This rule applies where a plaintiff performs most but not all of the material terms of a contract – where it consists of several component parts that can be neatly separated from each other. The key inquiry in deciding whether a contract is “entire” as opposed to “severable” (divisible, basically) is whether the parties gave a single assent to the whole transaction or whether they agreed separately to various parts of the contract.

Here, the court found that while the contractor didn’t finish about $1,000 worth of the $4,000-plus contract, it could still recover for the portions of the contract it did sufficiently perform.  The court found that certain aspects of the contract were different enough to allow piecemeal recovery.

Lastly, the court rejected the homeowners’ HRRA claim premised on the contractor’s failure to supply the required statutory brochure.  First, the court agreed with the contractor’s argument that it did in fact provide all HRRA disclosures.  Moreover, even if it didn’t furnish the forms, the plaintiff still failed to show any measurable damages caused by the HRRA breach.  At most, this was a technical violation that didn’t merit wholesale defeat of the plaintiff’s suit.

Take-aways:

A pretty straight-forward illustration of the substantial performance doctrine and what a homeowner and contractor must show to win on a breach of contract suit based on faulty construction. The case emphasizes that contractors aren’t held to a flawlessness standard but instead they only must perform the material parts of a contract in a workmanlike fashion.

This case also signals a court’s unwillingness to defeat a contractor claim where there is a technical violation of the HRRA.  Absent actual damages flowing from an HRRA misstep, a homeowner likely won’t win on this claim.

 

 

Seventh Circuit Files: Court Voids LLC Member’s Attempt to Pre-empt LLC’s Suit Against That Member

In Carhart v. Carhart – Halaska International, LLC, (http://law.justia.com/cases/federal/appellate-courts/ca7/14-2968/14-2968-2015-06-08.html) the plaintiff LLC member tried to shield himself from a lawsuit filed against him by the LLC by (1) taking an assignment of a third-party’s claim against the LLC; (2) getting and then registering a default judgment against the LLC; (3) seizing the LLC’s lone asset: its lawsuit against the plaintiff; and (4) buying the lawsuit for $10K.  This four-step progression allowed the plaintiff to extinguish the LLC’s claim against him.

Plaintiff was co-owner of the defendant LLC.  After a third-party sued the LLC in Minnesota Federal court (the “Minnesota Federal Case”), Plaintiff paid the third-party $150,000 for an assignment of that case.  Plaintiff then obtained a $240K default judgment against the LLC.

Meanwhile, the LLC, through its other owner, sued the plaintiff in Wisconsin State Court (the “Wisconsin State Case”) for breach of fiduciary duty in connection with plaintiff’s alleged plundering of the LLC.  While the Wisconsin State Case was pending, Plaintiff registered the Minnesota judgment against the LLC in Wisconsin Federal court.

Plaintiff, now a judgment creditor of the LLC, filed suit in Wisconsin Federal Court (the “Wisconsin Federal Case”) to execute on the $240K judgment against the LLC.  The Wisconsin District Court allowed the plaintiff to seize the LLC’s lone asset – the Wisconsin State Case (the LLC’s breach of fiduciary duty claim against plaintiff) – for $10,000.  This immunized the plaintiff from liability in the Wisconsin State Case as there was no longer a claim for the LLC to pursue against the plaintiff.  The LLC appealed.

The Seventh Circuit voided the sale of the Wisconsin State Case finding the sale price disproportionately low.

Under Wisconsin law, a chose in action is normally considered intangible property that can be assigned and seized to satisfy a judgment.  However, the amount paid for a chose in action must not be so low as to shock the conscience of the court.

In this case, the court branded the plaintiff a “troll of sorts”: it noted the plaintiff buying the LLC’s claim (the Wisconsin State Case) at a steep discount: the defendant paid $150,000 for an assignment of a third-party claim against the LLC and then paid only $10,000 for the LLC’s breach of fiduciary duty claim against plaintiff.

The court found that under Wisconsin law, the $10,000 the plaintiff paid for the LLC’s claim against him was conscience-shockingly low compared to the dollar value of the LLC’s claim.  The plaintiff did not purchase the LLC’s lawsuit in good faith.  The Seventh Circuit reversed the District Court’s validation of plaintiff’s $10K purchase so the LLC could pursue its breach of fiduciary duty claim against the plaintiff in the Wisconsin State Case.

Take-aways:

This seems like the right result.  The court guarded against a litigant essentially buying his way out of a lawsuit (at least it had the appearance of this) by paying a mere fraction of what the suit was possibly worth.  

The case serves as an example of a court looking beneath the surface of a what looks like a routine judgment enforcement tool (seizing assets of a judgment debtor) and adjusting the equities between the parties.  By voiding the sale, the LLC will now have an opportunity to pursue its breach of fiduciary duty claim against the plaintiff in state court. 

Planting GPS Device On Car Not Enough for Invasion of Privacy Claim – IL Fed Court

Troeckler v. Zeiser, 2015 WL 1042187, a recent Southern District of Illinois case, examines this question adapted to a plaintiff’s intrusion on seclusion claim filed against her ex-husband – the defendant who, with some help, secretly affixed a GPS device (a “black box”) to the plaintiff’s car.

The defendant’s two principal acts giving rise to plaintiff’s suit were (1) installing the GPS device; and (2) repeatedly trying to log-in to the plaintiff’s personal email, computer and cell phone accounts.  Plaintiff sued for invasion of privacy/intrusion on seclusion (the “Intrusion Claim”) and conspiracy against the ex-husband and the people he hired to install the device and log in to plaintiff’s e-mail.

The defendant moved to dismiss all claims and the Court dismissed some claims and sustained others.

On the Intrusion Claim, the court noted that in Illinois, intrusion on seclusion is a species of the invasion of privacy tort.  To make out a valid invasion of privacy claim in Illinois, a plaintiff must demonstrate (1) an unauthorized intrusion or prying into the plaintiff’s seclusion; (2) an intrusion that is offensive or objectionable to a reasonable person, (3) the matter upon which the intrusion occurs is private; and (4) the intrusion causes anguish and suffering.

Element (3) – the intrusion involves something that is private – generates the most litigation.  Case examples of private matters include poking holes in a bathroom ceiling and installing hidden cameras in a doctor’s examination room.  Conversely, private facts contained in public records (name, address, SS #, e.g.) do not satisfy the privacy element.

The court looked to a New Jersey case for guidance as to whether installing a GPS device was actionable intrusion on seclusion.  The New Jersey court in Villanova v. Innovative Investigations, Inc., 21 A.3d 650 (N.J.App.Ct 2001) held that a defendant who surreptitiously placed a GPS monitor on her ex-husband’s car (to see if he was cheating on her) was not an invasion of privacy where there was no evidence the defendant drove his car into a private or secluded location.

Following the reasoning of the NJ case, the Troeckler court dismissed the plaintiff’s Intrusion Claim since the plaintiff failed to allege that she drove her car somewhere in which she had a reasonable expectation of privacy.

The plaintiff fared better on the Intrusion Claim as it pertained to the defendant hacking into her private email accounts.  The court found that for purposes of a motion to dismiss, the plaintiff did sufficiently allege a claim for invasion of privacy based solely on the e-mail allegations.

The plaintiff won and lost parts of her conspiracy claim against her ex and the various people he enlisted to help him install the GPS device and breach the plaintiff’s emails accounts.  Civil conspiracy requires concerted action and an underlying wrongful act.  Since the plaintiff failed to establish invasion of privacy on her Intrusion Claim, there was no predicate tort for the conspiracy.

The result was different with respect to the e-mail hacking though.  Since logging in to the plaintiff’s private accounts was a possible invasion of privacy (at least at the early pleading stage), the conspiracy claim survived as it related to the e-mail claims.

Afterwords:

1/A defendant’s unauthorized hacking into a plaintiff’s private email accounts can underlie an intrusion on seclusion/invasion of privacy claim;

2/ In the context of installing a monitoring device on someone’s car, the privacy tort is applied literally: if the plaintiff doesn’t show that she drove somewhere private or “secluded,” invasion of privacy isn’t the proper cause of action to assert.  With the benefit hindsight, the plaintiff probably should have pled a violation of the civil stalking statute based on the defendant’s GPS installation.

Plaintiff Loses Bid to Repossess Dog Gifted to Ex: Illinois Replevin, Personal Property and Gift Law Basics

Koerner v. Nielsen, 2014 IL App (1st) considers the parameters of an inter vivos gift (a gift made during a giver’s lifetime) as they pertain to the question of who owns a dog after the break-up of a romantic relationship.

The plaintiff gave her then-boyfriend (the defendant) a dog (a Stig) for Christmas.  About fourteen months later, the parties’ broke up and the defendant moved out, taking the dog with him.  Plaintiff filed a replevin suit to get the dog back.

A two-day bench trial culminated in a judgment for the defendant. Plaintiff appealed.

Held: Affirmed.  Plaintiff made a gift of the dog to the defendant, defendant accepted the gift, and plaintiff failed to show that the gift was revoked.

Under Illinois personal property and gift law, where a defendant asserts that he owns something based on a gift from a plaintiff, he must prove, by clear and convincing evidence, donative intent: that the owner departed with “exclusive dominion and control over the subject of the gift” and delivered the property to the donee (the party claiming he is the gift’s recipient).

Donative intent is determined at the time of the transfer of property, and is based on what was done or said at the time of transfer, not at some later date.  The delivery element of a gift is satisfied where the parties live together (like here).

A gift in contemplation of marriage (e.g. an engagement ring) is a conditional gift.  If the condition (the marriage) never materializes, the property reverts back to the gifting party.

The court rejected plaintiff’s argument that she never delivered the dog to the defendant.  The plaintiff claimed that since she maintained insurance on the dog at all times and was listed as the owner on the dog’s registration papers, she never relinquished control of the dog.

The court found “documentary title is not conclusive of ownership” and noted that all that is required is that the donor part with exclusive dominion and control.

Since the plaintiff could point to no evidence that showed the gift of the dog to defendant was conditional on a later marriage or continuing the relationship, the court found that the defendant conclusively established that the dog was an unconditional gift to him and that he was the rightful owner.

Take-away:  This case is post-worthy for its discussion of a somewhat arcane legal topic (in the sense that inter vivos gifts are not often the subject of published opinions) in a commonplace fact setting.

The case holds practical relevance for lawyers and non-lawyers alike as it highlights the potential complications that arise when romantic cohabitants break up and there is no formal marital union to neatly divide their personal property upon dissolution.

Apparent Agency Questions Defeat Summary Judgment in Guaranty Dispute – IL ND

The Northern District of Illinois recently examined the nature of apparent agency liability in the context of a breach of guaranty dispute involving related limited liability companies (LLCs).  The plaintiff in Hepp v. Ultra Green Energy Services, LLC, 2015 WL 1952685 (N.D.Ill. 2015) sued to enforce a written guaranty signed by the defendant company in connection with a $250K-plus promissory note signed by a company owned by the defendant’s managing member.

The court denied the plaintiff’s summary judgment motion.  It found there were material and triable fact issues as to whether the person signing the guaranty had legal authority to do so.

The court first addressed whether the guaranty was supported by consideration.  Consideration is “bargained-for exchange” where the promisor receives something of benefit (or the promisee suffers detriment) in exchange for the promise.  A guaranty’s boiler-plate provision that says “For Value Received” creates a presumption (but one that can be rebutted) of valid consideration.

Where the guaranty is signed at the same time as the underlying note, the consideration for the note transfers to the guaranty.  But where the guaranty is signed after the note, additional consideration (beyond the underlying loan) needs to flow to the guarantor.  A payee’s agreement to forbear from suing can be sufficient consideration.

Here, the plaintiff agreed to extend the deadline for repayment of the note by thirty days.  According to the court, this was sufficient consideration for the plaintiff to enforce the guaranty.  **3-4.

Next, the court shifted to its agency analysis and considered whether the LLC manager who signed the guaranty had authority to bind the LLC.  Answer – maybe not.

Apparent agency arises where (1) the principal or agent acts in a manner that would lead a reasonable person to believe the actor is an agent of the principal, (2) the principal knowingly acquiesces to the acts of the agent, and (3) the plaintiff reasonably relies on the acts of the purported agent.

When considering whether a plaintiff has shown apparent agency, the focus is on the acts of the principal (here, the LLC), and whether the principal took actions that could reasonably lead a third party to believe the agent is authorized to perform the act in question (here, signing the guaranty on the LLC’s behalf).

The scope of an apparent agent’s authority is determined by the authority that a reasonable person might believe the agent has based on the principal’s actions.  Also, a third party dealing with an agent has an obligation to verify the fact and extent of an agent’s authority.  **5-6.

The court found there material questions of disputed fact as to whether the plaintiff reasonably relied on the LLC manager’s representation that he had authority to sign the guaranty for the LLC.  The court noted that this was an unusual transaction that was beyond the ordinary course of the LLC’s business (since it implicated a possible conflict of interest (the manager who signed the guaranty was an officer of the corporate borrower) and it resulted in a pledge of the LLC’s assets), and culminated in the LLC taking on another $125,000 in debt in exchange for a short repayment time extension.  * 7.

The anomalous nature of the transaction coupled with the affidavit testimony of several LLC members who said they had no knowledge of the manager signing the guaranty, created too many unresolved facts to be decided on summary judgment.

Take-aways:

1/ A guaranty signed after the underlying note requires additional consideration running to the guarantor;

2/ Great care should go into drafting an Operating Agreement (OA).  Here, because the OA specifically catalogued numerous actions that required unanimous written consent of all members, the LLC defendant had ammunition to avoid the plaintiff’s summary judgment motion.

As-Is Rider in Real Estate Contract Doesn’t Defeat Implied Warranty of Habitability in Home Sale – Fattah v. Bim Deconstruction – Part II of II)

The Fattah v. Bim (2015 IL App (1st) 140171) developer defendant seemed to have double protection.  Not only did the person it sold the home to (Buyer 1) waive the implied warranty of habitability, but Buyer 1’s buyer – the plaintiff – took the home “as-is” pursuant to a contract rider.

Despite the added layer of protection, the court still allowed the plaintiff’s case to proceed against the developer defendant. It’s reasons:

– the “as is” rider was part of the contract between plaintiff and Buyer 1: it has no bearing on plaintiff’s rights versus the defendant;

– even if the “as is” rider did impact plaintiff’s rights versus the  defendant,  the rider wouldn’t negate the implied warranty of habitability;

– that’s because the “as is” rider (in the plaintiff-Buyer 1 contract) didn’t mention the implied warranty of habitability or a waiver of it;

– where a purchaser agrees to accept a house “as is” and the “as-is” provision doesn’t refer to any implied warranties in general and also doesn’t disclose the consequences of waiving an implied warranty, the as-is provision can’t be viewed as a valid disclaimer that a home builder/developer can rely on.

(¶¶ 34-35)

The court also fond that when a purchaser accepts a home as-is, a builder/developer still has to carry its burden of proving the home buyer   knowingly waived the implied warranty of habitability “by showing a conspicuous provision [that] fully discloses the consequences of [the waiver.]”  Since the defendant failed to meet its burden, the as is rider didn’t defeat the earlier waiver of the implied warranty of habitability on the house.

The court further circumscribed the implied warranty waiver signed by Buyer 1.  It held that a waiver of an implied warranty of habitability protects only the person identified in the contract.  It doesn’t extend to unwitting parties (like the plaintiff) unless there is a clear intent for that waiver to apply to a third party.

The as-is rider precludes the plaintiff from pursuing Buyer 1 (who sold the home to plaintiff) for damages based on home defects but it does not impact plaintiff’s rights versus the developer.  The developer defendant was not party to the as-is agreement between plaintiff and Buyer 1  wasn’t a named beneficiary of it.

Now What?

While the plaintiff obtained a reversal of summary judgment in the builder’s favor, he still hasn’t won the case.  He must now carry his burden of proving the defendant breached the implied warranty of habitability.  He must prove: (1) latent defects in the house, (2) that interfere with the reasonably intended use of the house and (3) the latent defects manifested themselves within a reasonable time after the house was purchased.  

The court agreed that the patio collapse constituted a latent defect.  Plaintiff will now have to establish elements (2) and (3) – that the patio defects interfered with plaintiff’s use of the home and that he learned of the defects a reasonable time after he bought the house.

 

Implied Warranty of Habitability Waiver Doesn’t Bind Second Home Buyer: Deconstructing Fattah v. Bim (IL 1st Dist.)(Part I of II)

Fattah v. Bim, 2015 IL App (1st) 140171 will likely be viewed as a significant victory for homeowners (and a correlative loss for builders) in residential construction disputes.

The plaintiff bought a million-plus dollar home in Chicago’s northern suburbs from the defendant homebuilder “as-is” and subject to an earlier waiver of the implied warranty of habitability signed by a prior purchaser (“Buyer 1”) who sold the house to the plaintiff.

In reversing a bench trial judgment for the defendants, the court answered some important questions concerning the scope and enforceability of disclaimers contained in the sale of real property in Illinois.

Facts:

The sale of the home from defendant to Buyer 1 included a written waiver of the implied warranty of habitability that specifically provided it was binding on the seller, the purchaser, and any successors.

The plaintiff bought the property from Buyer 1 “as is” three years after Buyer 1 bought it.  The contract’s as-is rider provided, among other things, that the seller (Buyer 1) shall not be responsible for “the repair, replacement or modification of any deficiencies, malfunctions or mechanical defects on the Property or to any improvements thereon” and that Buyer 1 makes no representation or warranty to plaintiff concerning the Property’s condition, zoning or suitability for its intended use.

Despite this broad Rider’s language, the contract still required Buyer 1 to disclose known material latent defects.

Four months after plaintiff moved in, the patio collapsed and plaintiff sued the defendant homebuilder.  The trial court found for defendant at trial on the basis that Buyer 1’s implied warranty waiver extended to the plaintiff.  Plaintiff appealed.

Result: Reversed:

Rules/Reasoning:

The appeals court found that the earlier implied warranty of habitability waiver did not bind the plaintiff.  The court’s reasoning:

– the implied warranty of habitability is a creature of public policy that aims to protect innocent purchasers of new houses who discover latent defects in their homes;

– the implied warranty of habitability recognizes that the purchaser, who is generally not knowledgeable in construction practices, has to rely n the integrity and the skill of the builder-vendor, whose business is home building;

– it (the implied warranty of habitability) applies not only to builder-vendors, but also to subcontractors and developer-vendors;

– subsequent home buyers can be protected by the implied warranty of habitability.  This is because a “subsequent purchaser is like the initial purchaser in that neither is knowledgeable in construction practice and must rely on the expertise of the person who built the home to a substantial degree.”

– the warranty of habitability exists independently of a contract between the builder and twice-removed buyer and extends only to “latent defects which manifest themselves within a reasonable time after the purchase of the house.”

– despite the strong public policy reason behind the implied warranty of habitability, a “knowing disclaimer” of the warranty doesn’t violate Illinois public policy;

– one who seeks to benefit from a disclaimer has the weighty burden of establishing that the disclaimer is (1) conspicuous, (2) fully disclosed (along with its consequences) to the buyer, and (3) mutually agreed on by the parties.

(¶¶ 23-25).

With these principles in mind, the court found that Buyer 1’s waiver of the implied warranty of habitability was valid as it appeared prominently in the sales materials and recited the waiver’s impact of the Seller’s rights.

The court then considered whether Buyer 1’s waiver of the implied warranty was binding on plaintiff – a subsequent purchaser who lacked knowledge of the earlier waiver.

Finding that Buyer 1’s waiver did not bind plaintiff, the court noted there was no agreement between plaintiff and defendant and the waiver of the implied warranty of habitability never was brought to plaintiff’s attention.

The court held that an implied warranty of habitability can only be waived where it’s done so “knowingly.”  Here, the plaintiff wasn’t party to Buyer 1’s waiver and testified she wasn’t aware of the waiver when she (plaintiff) bought the house.  Since defendants didn’t refute plaintiff’s testimony, it failed to prove plaintiff knowingly bought the property subject to Buyer 1’s waiver of the implied warranty.  As a result, the waiver didn’t bind the plaintiff.

(¶¶ 28-31)

Take-aways:

1/ The implied warranty of habitability extends to subsequent home purchaser for latent (not overt) defects;

2/ A disclaimer or waiver of an implied warranty offered by a prior buyer won’t bind a subsequent buyer where that later buyer offers evidence that she lacked knowledge of the disclaimer or waiver and that the disclaimer’s importance wasn’t pointed out to her.

No Future Damages Allowed in Wage Payment and Collection Act Claim – IL 2d Dist.

Eakins v. Hanna Cylinders, LLC, 2015 IL App (2d) 140944 is the third in a trio of recent Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq., (“Wage Act”) cases that address an employee’s rights to recover future damages after an employer prematurely terminates a multi-year contract.

(The other two cases – Majmundar v. House of Spices (India), Inc., 2013 IL App (1st) 130292 and Elsener v. Brown, 2013 IL App (2d) 120209 are summarized here and here.)

The Eakins plaintiff sued after he was fired 14 months into a 24-month contract to serve as a plant manager for the industrial company defendant.  The employment contract was silent on grounds for termination.  The plaintiff sought as damages, compensation for the ten month remaining on the employment contract under a breach of contract theory and he joined a Wage Act claim.  The trial court entered summary judgment for the defendant on both claims and the plaintiff appealed.

Held: Breach of contract judgment reversed; Wage Act judgment for employer affirmed.

Q: Why?

A: The appeals court reversed the breach of contract judgment for the defendant employer.  In Illinois, an employment agreement with no fixed duration can be ended at the will of either party.  The contract here was clearly for a fixed term, 24 months, and so wasn’t at will.  By firing the plaintiff 14 months into the contract term, the defendant breached.

The court rejected defendant’s argument that the plaintiff’s failure to meet certain performance metrics (e.g. keep costs down, grow market share, meet sales quotas, etc.) justified defendant’s premature termination of the plaintiff.  The court found that since the contract didn’t specify poor performance (as opposed to outright failure to perform – e.g. by not showing up to work) as a ground for contractual cancellation, the defendant breached by firing plaintiff before the 24 months was up.

Otherwise, according to the court, any employer could transmute a fixed-term contract into an at-will one by claiming the employee didn’t meet the employer’s performance requirements.  The court remanded to the lower court so it could decide plaintiff’s money damages. (¶¶ 23-29).

The court did affirm judgment for the defendant on the Wage Act claim though.  Looking to Majmundar for guidance, the court held that unpaid future compensations coming due under an untimely ended employment contract doesn’t qualify as “final compensation” under the Wage Act.  The reason for this is that once an employee is fired, he no longer performs any services for the employer.  So the employer isn’t receiving anything of value from the employee to support an obligation to make future payments. (¶¶ 31-32).

Take-aways:

Where a contract is for a fixed term and doesn’t provide for “for cause” firing or otherwise spell out grounds for termination, the contract will be enforced as written in the employee’s favor and his failure to meet an employer’s subjective work standards won’t constitute a basis for nullifying the contract;

Future payments due under a fixed-term contract aren’t considered final compensation under the Wage Act since there is no reciprocal exchange (services for wages) once an employee is fired;

Procedurally, the case makes clear that the denial of a summary judgment motion is appealable so long as there are cross-motions for summary judgment filed and the disposition of those motions resolves all issues in a given case.

 

Ten-Year Statute of Limitations Applies to Demand Promissory Note: Three-Year ‘SOL’ For Negotiable Instruments Does Not

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Advanced Credit, Inc. v. Linares, 2012 IL App (1st) 121574-U is a fairly recent case illustration of what happens when two statutes of limitation with widely varying time lengths potentially govern the same case.

The defendant in Linares signed a promissory note in 2002 that was payable to the defendant “upon demand.”

The plaintiff payee of the note made a demand for payment in 2004 which the defendant ignored.  Plaintiff sued six years later (in 2010) to recover on the note and sought interest, fees and costs.

Defendant moved to dismiss on the basis that the three-year limitations period  governing negotiable instruments time-barred the complaint. (See 810 ILCS 5/3-104, 3-118.)  The plaintiff argued that the ten-year time to sue on demand promissory notes (735 ILCS 5/13-206) applied and so the suit was timely.  The trial court agreed with the defendant and dismissed the suit.  The plaintiff payee appealed.

Held: Reversed.  The ten-year statute, not the three-year one, applies to the demand promissory note.

Rules/Reasoning:

A note that is “payable on demand” is a demand note and is due and payable immediately upon execution.  810 ILCS 5/3-108.  A claim against the maker of a demand note accrues on the date the note is issued.

Code Section 13-206 provides for a ten-year limitations period for promissory notes and for demand notes.  Under this statute, a demand note plaintiff is barred if the note maker pays no note interest or principal for a period of 10 continuous years and no demand is made during that time.

Uniform Commercial Code Section 3-118(g) applies a 3-year limitations period for actions based on, among other things, negotiable instruments (example: a check).

Section 3-104(a) of the UCC defines a negotiable instrument as

(i) an unconditional promise or order to pay a fixed amount of money;

(ii) that’s  payable to order or to bearer at the time it (the instrument) is issued or first comes into possession of a holder;

(iii) is payable on demand or at a definite time; and

(iv) states no undertakings or instructions other than the payment of money.

Where two limitations period govern the same subject matter, the more specific one applies.  Here, since Code Section 13-206 specifically references “demand promissory notes” and UCC Section 3-104 doesn’t, the 10-year statute of limitations (“SOL”) governs.

The Note accrual date was 2004 when the plaintiff made demand for payment.  Since the plaintiff sued in 2010 – some six years later – it was within the 10-year limitations period for demand promissory notes under Section 13-206.

Afterwords:

A pretty straightforward application of conflicting limitations period rules.  The ten-year period for demand notes more specifically applied over the UCC’s three-year catchall provision.

When defending a promissory note case, I look for earmarks of negotiability (payable to order, at specific time, for specific amount) so I can argue the shorter three-year limitations period (of 3-118) applies.  When representing the note plaintiff/payee, I try to show the 10-year SOL applies and particularly look for any reference to “on demand” or “upon demand” in the text of the note.  This language will signal that a demand note is involved and mean the longer SOL governs.

 

Rule 103(b): Plaintiff’s Year-Long Delay In Serving Lawsuit Merits Dismissal For Lack of Diligence – IL 1st Dist.

Illinois Supreme Court Rule 103(b) requires a plaintiff to exercise diligence in serving a defendant.  The rule is based on the principle that litigation should have an end-date and not languish.  Rule 103(b) also heightens the probability that suits will be resolved when the underlying facts are fresh in the minds of the parties and witnesses and lessens the chance that trials will be tainted by stale evidence or faded memories.

Mular v. Ingram, 2015 IL App (1st) 142439 serves as a recent and harsh example of a plaintiff failing to actively find and sue a defendant.

The plaintiff was injured at the defendant’s home in July 2010 and sued in July 2012 – just before the two-year statute of limitations period for personal injuries ran.  735 ILCS 5/13-202 (two-year limitations period for personal injuries).  Over the next several months, the plaintiff issued multiple summonses to the wrong address.  The case was also dismissed for want of prosecution (DWPd) for several weeks before being reinstated by the plaintiff.  Almost three years from the occurrence and a full 1/2 year after the limitations period expired, plaintiff finally served the defendant.

The trial court dismissed the plaintiff’s suit with prejudice for lack of diligence in serving the defendant under SCR 103(b).

Holding: Affirmed

Rules/Reasons:

Rule 103(b) aims to protect a defendant from unnecessary delay in service of process.  The rule is designed to give a defendant a fair opportunity to investigate the nature of a plaintiff’s claims.  The rule doesn’t specify a specific amount of time for a defendant to be served and the trial court has wide discretion in considering a Rule 103(b) motion.

Once a defendant makes an initial showing that the plaintiff was not diligent in serving him, the burden shifts to the plaintiff to refute this.  The reasonable diligence standard is an objective one and the court does not consider whether the plaintiff intentionally delayed service.  While the defendant isn’t required to prove he was prejudiced by the delay, prejudice to the defendant is still a factor considered by the court.

Multiple factors guide the court’s analysis on a Rule 103(b) motion.  These include: (i) the length of time it took to serve the defendant; (ii) plaintiff’s efforts to obtain service; (iii) whether plaintiff knew of defendant’s whereabouts; (iv) whether the defendant’s whereabouts  could be easily obtained; (v) whether defendant was actually aware of the suit; (vi) whether the defendant was actually served; and (vii) any special circumstances that justify a service delay.

While the time period during which a case is voluntarily dismissed (non-suited) by a plaintiff is not calculated when assessing whether a plaintiff was reasonably diligent in obtaining service, the time where a case is involuntarily dismissed (such as a DWP) is included in the reasonable diligence calculus.

Where a plaintiff isn’t diligent but the defendant is still served before the statute of limitations period runs out, a Rule 103(b) motion can be granted without prejudice.  Where the defendant is served after the statute runs, the plaintiff’s case can be dismissed with prejudice.

(¶¶ 22-24).

Under these guideposts, the court found the plaintiff exhibited a lack of diligence.  She repeatedly put wrong addresses on multiple summonses when her own complaint correctly listed the defendant’s address.  The plaintiff also didn’t serve the defendant until nearly three years after the underlying incident and a year after the personal injury limitations period ran.  In addition, the plaintiff’s case was DWPd for over five weeks during the time preceding service on the defendant.

The plaintiff’s argument that the four-year statute of limitations for construction-related claims (735 ILCS 13-214) also failed.  The construction negligence statute only applies to activities related to the “design, planning, supervision, observation or management of a construction project.”  Defendant fit none of these categories; she was a landowner only.  With no complaint allegations that the defendant participated in the construction or design of a home, the plaintiff couldn’t rely on the four-year limitations period to sustain her claim.

Take-aways:

There’s no chronological litmus test for determining whether a plaintiff was reasonably diligent in getting service.  Where a defendant’s location is no mystery and several months elapse from suit to service, the plaintiff runs the risk of having his case dismissed.  This is especially true if the defendant isn’t served with the lawsuit until after the applicable statute of limitations expires.

The other lesson from the case is that the two-year, not the four-year, limitations period governs personal injury suits against landowners.  If the landowner defendant wasn’t involved in the construction or design of the accident site, he won’t be subject to the longer construction negligence limitations period.

“Never Ending”(?) Contract Still Definite Enough to Be Enforced – 7th Circuit

Burford v. Accounting Practice Sales, Inc. 2015 WL2261108 (7th Cir. 2015), deftly handles some tricky and recurring contract interpretation and enforcement issues that arise where a business agreement lacks a clear end date.

In the case, the plaintiff sued defendant for terminating a written year-to-year (and automatically renewing) contract for the plaintiff to market defendant’s accounting practice sales services in various states throughout the Southern U.S.  The agreement provided that the defendant could not terminate the contract “unless it is violated by [plaintiff].”  The district court found this language signaled an indefinite (and therefore, at-will) contract and granted summary judgment for the defendant.  The plaintiff appealed.

Held: Reversed.

Q: How Come?

A: Because in Illinois, indefinite contracts – contracts with no objective termination date – aren’t favored but can still be enforced in certain cases.  This is because parties should be free to order their business affairs as they see fit and unless there is fraud, duress or undue influence, a written contract should be enforced as written.

Parties can get around indefinite duration provisions by specifically spelling out grounds for termination of a contract.  A contract that lacks a fixed duration and that can only be cancelled for a specific event or “for cause” can be enforced and won’t be treated as an at-will contract (one that can be ended at any time for any reason) so long as the event or cause can be objectively gauged.

Here, the contract language negated its at-will character.  It could only be terminated if the plaintiff breached (“unless” he violated it).  Otherwise, the contract kept renewing every year.  The court found this termination provision specific enough to be enforceable by the plaintiff.  Since there was no evidence that the plaintiff breached the contract – defendant unilaterally ended the contract – summary judgment for the defendant was improper.

Policy concerns also supported the court’s decision.  It noted that if the defendant was allowed to freely terminate the contract like it did here, it would deprive the plaintiff of the economic basis of his bargain.  Meaning the plaintiff could spend a lot of time and money developing and marketing the defendant’s brand and then once terminated, he could be replaced by someone who could capitalize on all his work.

Conversely, the defendant would suffer if the plaintiff could escape the contract with impunity since the plaintiff could leverage the good will and relationships he fostered over a several-year period and take that good will to another company or use it himself and against the defendant.  The defendant was protected from this contingency by inserting a one-year non-compete and by allowing for “good cause” termination; defined as poor sales performance.

Since the parties contracted around the indefinite duration problem by allowing for termination only if the plaintiff violated the contract, it wasn’t an at-will contract.

Afterwords:

1/ The case gives a good illustration of the problems that arise where parties don’t specify when and in what situation a contract ends.  By taking some pains at the outset to make clear when a contract starts and ends, and establishing what constitutes a breach of “cause” for termination, the contract participants can likely avoid future litigation when one side decides to walk away;

2/  Substantively, the case amplifies that a contract lacking an objective termination date will be treated as at-will contract and can be terminated by any party at any time;

3/ If a contract can be terminated for a single specified reason, this will likely make the contract enforceable even though the contract lacks an objective termination date.

 

 

Legal Malpractice Claims: Elements and Damages: Illinois Case Snippets (2015)

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Two First District cases – one published, the other not – decided some eight days apart in April 2015, provide good capsule summaries of the pleading and proof elements of a legal malpractice claim in Illinois, the nature and reach of the attorney-client relationship (“A-C Relationship”) and the universe of possible damages that a plaintiff can recover in legal malpractice suits.

The plaintiff in Tuckaway Development, LLC v. Schain, Burney, Ross & Citron, Ltd., 2015 IL App (1st) 140621-U asked for over $1M but was awarded just over $1,000 in a case involving a late-recorded mortgage in connection with a related real estate deal.  Meriturn Partners, LLC v. Banner and Witcoff, Ltd.’s plaintiff (2015 IL App (1st) 131883) fared much better.  There, a jury awarded the private equity firm plaintiff a cool $6M in a case involving an intellectual property lawyer’s misguided advice concerning patents owned by a waste disposal company the plaintiff planned to invest in.

Here are some key legal malpractice points distilled from the two cases:

1/ To win a legal malpractice suit, a plaintiff must prove the existence of an A-C Relationship;

2/ An A-C Relationship requires both the attorney and client to consent to the relationship’s formation;

3/ That consent (to the formation of an A-C Relationship) can be express (by words) or implied (by conduct);

4/ A client can’t unilaterally create an A-C Relationship and his subjective belief that such a relationship exists isn’t enough to bind the attorney;

5/ Where an attorney knows a person is relying on his services or advice, an A-C Relationship exists;

6/ In some cases, third-party non-clients can establish that an attorney owes contractual duties to them (the third parties);

7/ An attorney’s obligations can extend to third-party non-clients where they are intended beneficiaries of the attorneys’ services;

8/ The measure of damages in an attorney malpractice suit are those damages that would put plaintiff in a position he would have been in had the attorney not been negligent;

9/ Legal malpractice damages present a question for a jury and that damage assessment is entitled to great deference;

10/ Absent evidence that the jury failed to follow the law, considered erroneous evidence or that the verdict was the result of passion or prejudice, an appeals court can’t negate the verdict.

Tuckaway, ¶¶ 28-30; Meriturn, ¶¶ 10, 18.

In Meriturn, the court ruled that the IP lawyer’s duties extended to third party investors even though he never signed a contract with them. The key evidence supporting the finding included testimony and e-mails that showed that the lawyer knew that outside investors were relying on his patent opinions and also illustrated some direct communications between the lawyer and the (non-client) third party investors.  

The lawyer’s failure to limit the scope of his representation to the plaintiff investment firm made it easy for the court to find the lawyer’s fiduciary duties extended beyond his immediate client, the plaintiff.  

The court also upheld the jury’s $6M damage verdict in Meriturn against the plaintiff’s claim that it was too low (the plaintiff sought over $23M,)  While the plaintiff sought lost profits (profits lost as a result of the investment going bad due to the bad patent advice), those damages were foreclosed by the “new business” rule.  

Since the plaintiff’s investment in the waste disposal company was a new venture for both the plaintiff and the company, any claimed lost profits were purely speculative and couldn’t be recovered.

Tuckaway’s paltry damages sum awarded to the plaintiff was also supported by the evidence.  There, the lawyer defendant offered uncontested expert testimony that the property that was subject of the late mortgage recording was worth next to nothing since it was already encumbered by a prior mortgage.  

As a result, the jury’s damage amount – some 800 times less than was claimed by the plaintiff – was supported by the evidence.

Take-aways:

1/ An attorney who doesn’t clearly define and limit the scope of his representation can find himself owing duties to third party “strangers” to his attorney-client agreement;

2/ A jury is given wide latitude in fashioning damage awards.  Unless there is obvious error or where it’s clear they considered improper evidence, their damage assessment will be sustained.

 

Law Firm Not An Employment Agency – Can Recover In Quantum Meruit For Negotiating Personal Services Contract (IL Law)

 

Todd W. Musburger, Ltd. v. Meier, 394 Ill.App.3d 781 (1st 2009), while dated, is still post-worthy for its in-depth discussion of a lawyer’s quantum meruit recovery  from a client after the client fires the lawyer under a contingent fee contract.

The defendant radio personality had previously hired the plaintiff law firm under a multi-year written contract to serve as the defendant’s exclusive agent in negotiating defendant’s radio and television contracts.  That contingent fee contract called for the defendant to pay plaintiff 5% of the gross amount of any contract consummated by the plaintiff.

Plaintiff claimed that after the fee agreement was verbally renewed, the plaintiff spent about 200 hours over a one-year period negotiating the renewal of defendant’s radio contract with the WLS (AM 890) station and shopping defendant to competing stations.

Plaintiff alleged that its aggressive negotiation efforts culminated in a $12M/10-year contract offer from WLS; an offer rejected by defendant.  Plaintiff would have received $600,000 under the parties’ contingency contract if the defendant accepted the station’s offer re-upped there.

After it was fired by the defendant, the firm sued to recover for the value of its pre-termination work on the defendant’s behalf.

At trial, a jury awarded damages to the plaintiff of about $70K and the defendant appealed.

Held: Affirmed:

Q: Why?

A:  The court stated the operative rules governing attorney-client relationships and an attorney’s entitlement to recover fees:

– a client may discharge her attorney at any time, with or without cause;

–  when a client fires an attorney who was representing the client on contingency, the contingent-fee contract ceases to exist and is no longer operative;

– a discharged attorney may be compensated for the services rendered before the termination of the contingent fee contract on a quantum meruit basis;

– Quantum meruit is based on the implied promise of a recipient of services to pay for valuable services because otherwise the recipient would be unjustly enriched.”

– in quantum meruit recovery, the former client is liable for the reasonable value of the services received during the attorney’s employment.

–  an attorney’s quantum meruit recovery can be barred if an attorney has engaged in illegal conduct;

– just because a client doesn’t receive tangible benefits from a lawyer’s services, doesn’t mean a lawyer can’t recover  in quantum meruit.

The court affirmed the jury verdict and rejected all of defendant’s arguments on appeal.

The court first rejected defendant’s argument that plaintiff was prevented from recovering since it wasn’t licensed as a private employment agency under the Illinois Private Employment Agency Act 225 ILCS 515/11

The court found that plaintiff – a law firm – didn’t meet the statutory definition of “employment agency” since the plaintiff was hired to draft and negotiate on-air talent contracts.  It wasn’t a recruiter or job placement firm.

Next, the court affirmed the trial court’s barring defendant’s retained expert, a lawyer, from testifying that plaintiff shouldn’t have been allowed quantum meruit recovery and that plaintiff breached its fiduciary duties to the defendant.

In Illinois, the decision to admit or bar expert testimony is within the sound discretion of the trial court and the trial court’s ruling will not be reversed absent an abuse of that discretion.

Expert testimony is admissible if the proffered expert is qualified by knowledge, skill, experience, training, or education, and the testimony will assist the trier of fact in understanding the evidence.  But – “expert testimony as to legal conclusions that will determine the outcome of the case is inadmissible.”

Here, the trial court properly barred the defendant’s expert’s quantum meruit opinions since they invaded the province of the trial court.  It’s an axiom that the trial court decides legal issues while the jury decides factual ones.  The defendant’s excluded testimony that plaintiff wasn’t entitled to quantum meruit recovery was a pure legal conclusion.

The court upheld the jury’s quantum meruit damages award.  The court cited the voluminous trial testimony (over 100 pages in the record), offered in chronological detail, where plaintiff discussed the nature and difficulty of the contract negotiations carried out on defendant’s behalf, the money and degree of responsibility involved, and the time and labor required  Plaintiff’s testimony was supported by a radio station executive who had first-hand knowledge of the negotiations.

Afterwords:

  • This case provides a useful summary of quantum meruit in a fairly convoluted and interesting fact pattern involving high-level personal services contracts;
  • A law firm isn’t a job placement agency under the Illinois Private Employment Agency Act and so doesn’t have to be licensed to recover for employment contract negotiations;
  • A lawyer can recover for pre-termination services where he can support and quantify the services either through documentary or testimonial evidence.

 

 

Commercial Frustration and Prior Material Breach – Mizzou Appeals Court Weighs In

Clean the Uniform Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602 (Mo. 2009), a case from a jurisdiction I don’t practice in and that involves an unsexy fact pattern and monetary amount (less than $20K), still has some across-the-board relevance for its examination of liquidated damages clauses and the commercial frustration contract defense – two staples of commercial disputes.

The plaintiff and defendant entered into a three-year contract (the “Services Contract”) for plaintiff to rent cleaning uniforms and supplies to the defendant.  The contract called for the defendant to make at least partial payments on a weekly basis.  The contract contained a liquidated damages provision that said if the defendant prematurely terminated the Services Contract, the plaintiff could recover 50% of the average weekly rental charges for the six month period preceding the breach times the number of weeks remaining in the contract term.

The Services Contract also provided that it would be suspended for events that occurred beyond the parties’ control (a “force majeure” clause).

Defendant defaulted when its own one-year contract (the “Hospital Contract”) with a large VA hospital expired and wasn’t renewed.  Without the large VA hospital account, defendant couldn’t pay under the Services Contract.

Plaintiff sued to recover past-due amounts and liquidated damages under the Service Contract’s early termination provision.  The defendant argued that the VA hospital’s refusal to renew the Hospital Contract was an event beyond defendant’s control and excused its contract obligations to the plaintiff.

The trial court entered judgment for the plaintiff and the defendant appealed.

Held: Affirmed.

Q: Why?

The court found that the Hospital Contract’s termination was an event beyond defendant’s control.  The law is that if a party to a contract wants its performance to be excused if a certain event happens, and that event is reasonably foreseeable to happen after a contract is signed, the party should expressly provide for that contingency in the contract.

The commercial frustration doctrine posits that “if the happening of an event not foreseen by the parties and not caused by or under the control of either party has destroyed or nearly destroyed either the value of the performance or the object or purpose of the contract, then the parties are excused from further performance.”

While performance is technically still possible in a commercial frustration case, the defense will apply if the expected value of performance by a party has been destroyed by an intervening and unexpected event.

The court held that the defendants should have appreciated that the Hospital Contract could expire during the term of the Services Contract and not be renewed.  The defendant could have negotiated to make the Services Contract dependent on the continuing viability of the Hospital Contract but didn’t do so.  It wrote: “non-renewal of the [Hospital Contract] was a reasonably foreseeable risk at the time of contracting that did not excuse Customer’s performance under the [Services Contract].”

For the same reason, the defendant’s argument that it’s default was caused by an event beyond its control failed.  The Service Contract’s force majeure provision listed “strikes” and “lockouts” as specific events beyond the parties’ control.  But a third party’s refusal to renew an ancillary agreement (here, the Hospital Contract) wasn’t similar enough to a strike or lockout to absolve defendant’s payment obligations under the Service Contract.

Afterwords: To prevail on a commercial frustration argument, a defendant has a heavy burden.  Parties should take pains to spell out events that could happen during the term of a contract that makes it impossible for one party to perform its obligations.  A failure to clearly account for contingencies can result in a court finding that you assumed the risk of an intervening event making contractual performance impossible

 

 

 

 

 

Judicial Notice, Screenshot Evidence and On-line “Browsewrap” Contractual Arbitration Clauses – A Case Note

Judicial notice serves the salutary purpose of saving litigation time and expense.  It applies in situations where one party wants to establish a fact that’s not subject to reasonable dispute (e.g. Sacramento is the capital of California, for instance).  Judicial notice’s effect is that the party doesn’t have to endure the time and expense of calling a witness to testify or to marshal cumbersome documents to prove the generally known fact.

The rule is codified at Federal Rule of Evidence (and Illinois Rule of Evidence) 201.  Van Tassell v. United Marketing Group, LLC, 795 F.Supp.2d 770 (N.D.Ill. 2011) is a fairly recent case application of judicial notice in the context of a class action consumer fraud action versus various on-line vendors for unapproved credit card charges.

In addition to its clear judicial notice illustration, the case also has value for its discussion of the key factors governing on-line contracts that contain hard-to-find alternative dispute provisions.

Here’s some key judicial notice points, gleaned from the case (and others like it):

– Under FRE 201, a court may take judicial notice of an adjudicative fact that is not subject to reasonable dispute;

– An adjudicative fact is one that applies specifically to the parties in a specific case (as opposed to “legislative facts” which involve more general facts that could apply across the board to any situation);

– A fact is not subject to reasonable dispute where (1) it is generally known within the territorial jurisdiction of the trial court; or (2) is capable of accurate and ready determination by resort to sources whose accuracy can’t reasonably be questioned.

One of the on-line vendor defendants moved to dismiss the complaint and attached screenshots of on-line enrollment forms, which contained pro-merchant disclaimer language.  The defendant asked the court to take judicial notice of the enrollment pages since they were printed off the Internet.

But the court refused to take judicial notice of the Web pages.  In their response to the motion, the plaintiffs filed affidavits stating they never viewed the enrollment pages.  They (the plaintiffs) also didn’t refer to the enrollment pages in their Complaint.  As a result, the Web enrollment pages weren’t properly before the court on a motion to dismiss since on a Rule 12(b)(6) motion, a court typically only considers the face of a complaint and any documents “central” to a complaint.

Next, the court addressed whether the various on-line contract’s arbitration provisions were enforceable against the consumer plaintiffs on an on-line merchant defendant’s motion to compel arbitration.

Cyberspace contracts don’t change the elemental rules of contract formation: a contract requires a meeting of the minds and a manifestation of mutual assent.  Two common Internet contracts are clickwrap agreements and browsewrap agreements.  In the former, the webpage user must take affirmative steps to accept on-line contract terms; usually by clicking “accept” or checking an “I agree” box.  With a browsewrap contract, though, no action needs to be taken to “accept” the on-line vendor’s contract terms.  Using the site equates to accepting the terms.

The contract here involved a browsewrap contract and so was subjected to closer court scrutiny.  Since the arbitration provision was couched in the site’s “Conditions of Use” section which could only be accessed via a multi-step process, the court found the provision wasn’t prominent enough to be enforced.  As a result, the court denied the merchant’s motion to compel arbitration.  (pp. 779-780, 789-791).

Take-aways:

1/ The case provides an interesting applications of judicial notice to computerized context.  While this court didn’t take judicial notice, I’ve found it to be an economical time-saving device as it eliminates the need to go through the cumbersome exercise of gathering evidence on issues for which there’s really no room for debate;

2/ Arbitration provisions buried in a maze of fine print or that can only be located through a tedious, multi-step process won’t be enforced;

3/ Browsewrap contracts that result in a user’s passive acceptance of contract terms are more stringently construed by a court than is a clickwrap contract.

Moving for Default Judgment In Federal Court – Plausible Claims and Damage Calculations (A Brief Case Note)

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(photo credit: sociallyclean.com (via Google Images – 5.15.15)

Malibu Media, LLC v. Funderburg, 2015 WL 1887754 (N.D.Ill. 2015) discusses the governing standards for obtaining a default judgment in Federal court in a decidedly post-modern fact context.  The plaintiff adult film producer sued the defendant for copyright infringement based on the viewer defendant’s unauthorized movie downloads.

Defendant orchestrated hundreds of movie downloads over a span of about three months through the BitTorrent file sharing system.  BitTorrent basically allows a user to download component parts or “bits” of a file, send them to others (“peers”) who then splice the bits together to make a cohesive whole file. When Defendant failed to respond to the Complaint, the plaintiff sought a default judgment of $27,000 – triple the sum of minimum statutory damages under the Copyright Act.  See 17 U.S.C. s. 504.

The court granted the motion for default but only awarded a fraction of the damages sought.  In doing so, the court stated the operative Federal court default rules:

– Federal Rule of Civil Procedure 55 allows a court to enter a default judgment where a defendant fails to plead or otherwise defend a suit;

– On a default motion, the court takes as true, all well-pled allegations as to liability;

– A default judgment establishes as a matter of law that a defendant is liable for each of a plaintiff’s claims;

– A plaintiff seeking default judgment, must show a “plausible” claim;

– If plaintiff’s damages are easily calculable, he can usually get a money judgment based on an affidavit alone;

– A default judgment can enter against a minor or incompetent person only if represented by a guardian, conservator or other fiduciary;

– Since minors frequently use the internet for downloading movies, a plaintiff usually must do more than offer blanket assurances that the defendant isn’t a minor.

(**1-3).

Here, plaintiff stated a plausible copyright claim: (1) that it owned the copyright in the 12 movies in question; and (2) that defendant infringed the copyright.  Courts distinguish between Internet subscribers and infringers: just because someone is an account holder of a given IP address doesn’t mean the account holder is the one downloading files.

Here, though, the court noted that defendant was connected to the infringing IP address and that there were hundreds of file downloads over a short period of time.  Considered with plaintiff’s unchallenged complaint allegations, the court found that the defendant, an adult, was the proper defendant.

The Court reduced plaintiff’s damage claim.  Under the Copyright Act, an infringer is subject to statutory damages raising from $750 to $30,000 for any single infringed work.  17 U.S.C. s. 504(c).  Here, the court found that while the plaintiff probably wasn’t a “non-producing troll” (someone who enforces copyrights just to extort money from people who are too embarrassed to fight a Federal porn suit), the court still found that a damage award that was three times the statutory floor was excessive.

The court ultimately awarded damages of $9,000 – $750 for each (all 12) movie that was downloaded in addition to attorneys’ fees of over $2,000.

Take-away:

This case provides a good summary of basic requirements for obtaining default judgments in Federal court.  In a default case where a statute provides a range of damages, a default-seeking plaintiff will likely need to show intentional conduct to get damages that eclipse the statutory minimum;

While being tied to a specific IP address, alone, isn’t enough to definitively identify a defendant, it will go a long way in doing so; especially if there is other evidence connecting a defendant to a given address and the IP account holder doesn’t put up a fight (as was the case here).

Pleading Fraud ‘On Information And Belief’ Fails Rule 9 Specificity Test

In Deschepper v. Midwest Wine and Spirits,2015 WL 1433230, the Northern District considered the necessary pleading allegations for claims based on the Illinois Wage Payment and Collection Act (“IWPCA”), common law fraud and successor liability in an employment dispute involving former salespersons of a liquor wholesaler.  The employer (and their principals) defendants moved to dismiss under FRCP 12(b)(6).  The court granted in part and denied in part the motion.

The Illinois Wage Payment and Collection Act Claim

Upholding the IWPCA claim, the Court held that to state a claim under the IWPCA, a plaintiff “must plead that wages or final compensation is due to him or her as an employee from an employer under an employment contract or agreement.” 820 ILCS § 115/5.  An employment contract or agreement under the IWPCA doesn’t have to be formal or even written.  Instead, employers and employees can manifest their assent to employment terms by conduct alone.

Here, while there wasn’t a formal written employment contract, the Court still sustained the IWPCA count since the plaintiffs alleged that they had a hybrid salary-plus-commissions arrangement.  This was enough to survive dismissal of the IWPCA claim.

Successor Liability

A plaintiff suing under a Federal statute (like the Fair Labor Standards Act here) can sue on a successor liability theory where (1) the successor had notice of the plaintiff’s claim prior to the acquisition; and (2) there was substantial continuity in the operation of the business before and after the sale/acquisition.

The plaintiffs stated sufficient factual allegations to support a successor liability claim against a corporate entity plaintiff said was formed for the purpose of continuing the employer defendant’s business while avoiding that first employer’s Federal overtime payments to employees obligations.

Fraud

Plaintiffs fraud claims failed because they pled the facts “on information and belief.”  Alleging fraud on information and belief is insufficient to state a fraud claim unless (1) the facts constituting the fraud are not accessible to the plaintiff and (2) the plaintiff provides the grounds for his suspicions.

The court found that the plaintiffs’ shotgun pleading, and generalized assertions of fraud weren’t specific enough to place the court and the defendants on notice of the alleged factual basis for the claimed fraud. As a result, the Complaint didn’t satisfy FRCP 9(b)’s  particularity requirement for alleging fraud.

The fraud claim was also deficient since plaintiffs didn’t allege that the underlying fraud facts weren’t accessible to them and also failed to plead the factual bases for their suspicions that defendants were setting up various business entities to evade paying overtime to the plaintiffs.

Afterwords:

– An actionable IWPCA claim doesn’t require a formal written agreement.  All that’s required is the employer and employee manifest assent to payment terms through their conduct;

– Fraud pleading must rise above notice pleading under FRCP 9(b).  Absent specific factual assertions to support the fraud, the claim will likely be dismissed;

– Successor liability applies where defendant forms an entity that is arguably set up to avoid predecessor corporate obligations.

‘Winning’ Failure To Mitigate Defense Doesn’t Confer ‘Prevailing Party’ Status On Restaurant Tenant In Lease Dispute Att’y Fee Hearing Dispute

Alecta v. BAB Operations, Inc., 2015 IL App (1st) 132916-U, a case I spotlighted earlier for its analysis of lease assignment liability rules, also provides a valuable discussion of contractual attorneys’ fees provisions basics. (See case’s bullet-points on lease assignment issues here: http://paulporvaznik.com/bagel-shop-successor-tenant-hit-for-rent-damages-and-attorneys-fees-in-commercial-lease-case-il-first-dist/8491)

The court affirmed a $70k-plus fee award for the landlord even though its damages were reduced by $20k for failing to mitigate damages. Code Section 9-213.1 (of the Illinois eviction or forcible statute) obligates a suing lessor to mitigate  its damages.  This means the landlord can’t sit back while rent payments become due and pile up without making measurable efforts to re-rent the premises.

On the attorneys’ fees issue, the law in Illinois is that the unsuccessful party usually has to pay his own fees unless there is a contract provision regarding attorneys’ fees or an applicable statute allows for fees.  In addition, a clearly worded fee-shifting clause should be enforced as written in favor of the prevailing party.

Q1: Who Is A Prevailing Party?

A: The one who is successful on a significant issue and achieves some benefit in bringing suit.  But, a litigant doesn’t have to succeed on all claims to be considered a prevailing party.

Where a case involves multiple claims and both parties win and lose on different claims, it may be that neither side is the prevailing party.

Q2: What Does Fee Petitioner Have To Show?

A:  The party petitioning for attorneys’ fees has the burden of presenting sufficient evidence to the trial court and a fee petition must specify (i) services performed, (ii) who performed them, (iii) time expended on the services, and (iv) the hourly rate charged by counsel;

Other fees factors for the trial court to consider include (a) skill and standing of attorneys, (b) nature of the case, (c) complexity of the issues, (d) importance of the case, and (e) degree of responsibility required to prosecute or defend a case.

A court considering a fee petition can also rely on its own experience.

¶¶ 72-74.

Here, the defendant lease assignee only prevailed on part of its failure to mitigate defense and didn’t file or win any counterclaims.  An affirmative defense differs from a counterclaim in that the former seeks to defeat a plaintiff’s claim while the latter (counterclaim) seeks affirmative relief from the plaintiff.  See ,e.g. Nadhir v. Salomon, 2011 IL App (1st) 110851, ¶¶34 – 38 (A “set-off” is a counterclaim; not an affirmative defense since the set-off defendant/counter-plaintiff seeks affirmative monetary relief against the plaintiff/counter-defendant.)

The court held that a $20,000 reduction off an over $80k  money damage verdict isn’t enough of a damages cut to make the defendant a prevailing party on the mitigation issue.  As a result, the trial court was within its discretion in awarding 80% of the plaintiff’s claimed fees.  Since the trial court found that the plaintiff prevailed on approximately 80% of its case (based on the partial reduction for failure to mitigate), the court’s fee award of over $70K was upheld.

Afterwords:

The case gives a good refresher on fee-shifting factors an Illinois court considers as well as further refinement of who is/who isn’t a prevailing party in litigation.

An interesting question is what would have happened if the tenant filed a counterclaim (as opposed to affirmative defense) and was able to obtain a $20K damages reduction on a set-off theory.  I don’t know if it would have made a difference here since $20K off a $80K money award likely isn’t big enough to merit “prevailing party” status.

 

Bagel Shop Successor Tenant Hit For Rent Damages and Attorneys’ Fees in Commercial Lease Case – IL First Dist.

6945015869_a7cf0dd963_bThe First District affirmed a money judgment of about $150,000 (including $70,000 in attorneys’ fees) in a commercial lease dispute  in Alecta v. BAB Operations, Inc., 2015 IL App (1st) 132916-U.  An unpublished opinion, it’s useful for its vivid illustration of the importance of lease drafting clarity and an assigning tenant documenting its intent to not be responsible for post-assignment rent payments.

For over 15 years, the plaintiff landlord leased the property to various bagel shops.  The master lease was assigned six times over that time span. When the sixth assignee defaulted, the plaintiff sued multiple defendants including the third lease assignee – the defendant who ultimately got hit with the money judgment. (The other defendants either settled out or were defaulted.)

On appeal, the defendant (the third lease assignee) argued it was immunized from lease liability after it assigned the lease to a successor (the fourth assignee) several years earlier and that the trial court shouldn’t have awarded the landlord’s attorneys’ fees.

Affirming the money judgment, the First District provides a useful primer on contract interpretation rules applied in the commercial lease context.

– A court interprets a contract by looking to its plain language to discern the intent of the contracting parties;

– The court considers the contract in its totality and tries to harmonize each part of the contract;

– If the contract is unambiguous, the court interprets it without considering any outside evidence as to what the contract is supposed to mean;

– if the contract is ambiguous – meaning it’s susceptible to more than one meaning, the court can consider external evidence to try to resolve the ambiguity;

– a contract can be modified but the changes must materially alter the parties’ rights and duties before the change is regarded as a new contract or agreement;

– A contract can be assigned.  An assignment operates to transfer to the assignee all of the assignor’s right, title or interest in the thing assigned, and the assignee then stands in the shoes of the assignor;

– A lease is a type of contract that is governed by general contract law and can be assigned;

– It (a lease) creates privity of contract (which obligates a tenant to pay rent) and privity of estate (right to possession, basically) between the lessor and the lessee;

– Where a lease is assigned, but not assumed, there is privity of estate between the landlord and the assignee but not privity of contract.  This means the assignee can avoid further lease liability by vacating the premises or assigning to someone else;

– By contrast, where a lease is assumed (“assumption of the lease”), the party assuming the lease remains responsible to the landlord through the life of the lease even after the assuming party decamps the premises or assigns the lease;

¶¶ 40-61.

Here, the court found the assignment from the defendant to the fourth assignee ambiguous.  The assignment’s text was conflicting because at one point it said the defendant was released from further lease obligations while another section provided the assignor/defendant’s liability to the landlord remained intact.  Because the assignment language clashed on the defendant’s future (after the assignment) lease liability, the court heard trial testimony as to what the parties intended when they drafted the assignment and ultimately found for the landlord.

Afterwords:

This case serves as a good reminder of how a court interprets a written contract and handles textual ambiguity.  Any contractual ambiguity will be determined against the drafter of the contract.  Since the defendant is the one who drafted the assignment here, the court sided against it and found it liable for the lease breaches of the later assignees.

The case is also useful for its discussion of lease assignments versus lease assumptions and the different liability rules that flow from that dichotomy.  If the parties intent is to relieve an assignor from further liability, they should take pains to document that intent.

 

 

 

 

Expert Witness Testimony In Federal Court

Here’s a case that’s a little dated (2012) but still post-worthy for its detailed discussion of punitive damages and the standards for expert testimony admissibility in Federal court.

In Baldonado v. Wyeth, 2012 WL 1520331, the Northern District partially granted a motion to bar plaintiff’s economics expert from testifying on plaintiff’s punitive damages and a defendant pharmaceutical company’s net worth in an injury suit involving one of defendant’s hormone replacement products.

In support of her case, the Plaintiff offered the  expert opinions of an economist who offered opinions on both the defendant’s net worth and the amount of punitive damages due the plaintiff.

In partially granting the defendant’s motion to bar the testimony, the court provides a nice gloss on the required showings for getting expert opinions into evidence in Federal courts.

Punitive Damages and Expert Testimony

– Under Federal Rule of Evidence 702, a witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (1) the expert’s knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (2) the testimony is based on sufficient facts or data; (3) the testimony is the product of reliable principles and methods; and (4) the expert has reliably applied the principles and methods to the facts of the case;

– Federal district courts employ a three-part test before admitting expert testimony: (1) the expert must be qualified as an expert by knowledge, skill, experience, training, or education; (2) the expert’s reasoning or methodology underlying his testimony must be scientifically reliable; and (3) the expert’s testimony must assist the trier of fact in understanding the evidence or to determine a factual issue;

 – A damages expert should not give an opinion on the amount of punitive damages the jury should award;

 – a punitive damage amount is for the jury to decide based on the facts of this case and the applicable punitive damages law.

See FRE 702.

The court found that the Plaintiff’s economist improperly testified that the jury should assess punitive damages between $6.4 billion and $7.1 billion based on defendant’s daily profit rate for the drug in question and his review of SEC guidelines for punitive damages in antitrust cases.

Since it was improper for the expert to opine on the specific punitive damages to be awarded as well as what damages calculation formula to apply, the court granted the motion to bar the expert from testifying on the proper measure for punitive damages.

Punitive Damages and ‘Net Worth’ Testimony

The court next addressed whether plaintiff’s expert could opine that the defendant pharmaceutical giant was worth about $62 billion.  In the context of punitive damages and in the accounting realm, “net worth” means the excess of a company’s total assets minus total liabilities.

In Illinois, a plaintiff can present evidence of a corporate defendant’s net worth where punitive damages are at issue.  A defendant’s profits or net worth is relevant where a plaintiff alleges a claim that may merit punitive damages.

But because of their penal nature, punitive damages are disfavored and courts cautiously avoid assessing punitives unless clearly they are clearly warranted.  While the amount of punitive damages is a question for the jury, the threshold decision of whether the facts of a particular case justify the imposition of punitive damages is for the judge to decide.

The Court ultimately ruled that a further hearing was necessary to probe the basis for the expert’s net worth finding.  Since the expert appeared to substitute a “market capitalization” (number of outstanding shares times share value) analysis instead of a straight assets-minus-liabilities one to measure the defendant’s net worth, the expert’s underlying methodology wasn’t sound enough to get his report into evidence without an additional hearing.

Afterwords:

1/ Where an expert offers damages and net worth testimony, especially for a global corporate defendant, his predicate methodology must be based on sound data for his testimony to be admissible;

2/ While a defendant’s net worth is relevant to the punitive damages question, a court must still make a threshold decision that a given case warrants punitive damages;

3/ The plaintiff who seeks a punitive damages award has the burden of showing how he or she arrived at the ultimate net worth valuation for a defendant.

 

LLC Members Not Liable to Deceased Member’s Estate; Partnership’s Assets Become LLC’s Upon Conversion

The First District recently examined the nature of a limited liability company (LLC) member’s personal liability and the requirements for converting a general partnership to an LLC.

In Daniel v. Ripoli, 2015 IL App (1st) 122607, a case with a labyrinthine fact pattern, an LLC member’s estate sued an accounting company LLC to recover distributions the estate claimed was owed the deceased member under the LLC operating agreement.

The LLC defended by asserting that the deceased’s distribution amount was permanently reduced before he died by an amendment to the operating agreement.  The trial court entered a money judgment of about $200,000 for the plaintiff and the LLC appealed.

Held: reversed.  The operating agreement’s amendment lessened the deceased member’s distribution amounts from the amendment date forward.

Rules/Reasons:

1/ In Illinois a contract can be modified by express agreement or by conduct.  A contractual modification that’s not expressly agreed to can be ratified by acquiescence in a course of conduct consistent with recognizing the modification;

2/ An LLC provides more insulation from liability for its members than does a corporation for its shareholders;

3/ Under Section 10-10(a) of Illinois’ LLC Act, 805 ILCS 180/10-10(a), LLC members aren’t liable for debts of the LLC unless (1) the articles of organization provide for personal liability; and (2) the member has consented in writing to the adoption of a personal liability provision;

3/ The failure of an LLC to observe usual corporate formalities in connection with the operation of its business is not a basis for imposing personal liability on LLC members or managers;

4/ When a general partnership converts to an LLC, all that’s required is each partner vote for the conversion.  The partnership does not need to also transfer all of its assets to the newly formed LLC;

5/ Once the conversion from partnership to LLC is complete, all debts and assets of the partnership automatically become those of the LLC;

7/ An LLC member can sue the LLC or another member for legal or equitable relief with or without an accounting to enforce the member’s rights under the LLC Act, the operating agreement or any other rights of the member;

8/ The death of an LLC member results in the member’s disassociation from the LLC;

9/ The LLC Act does not allow for a deceased member’s estate to sue the LLC or other LLC members on the deceased member’s behalf;

805 ILCS 180/10-10(a), (c), 180/15-20.

The court held that here, once the accounting general partnership converted to an LLC, the LLC members (who were the erstwhile partners) had no liability to non-members like the plaintiff.

Additionally, the parties’ conduct indicated a mutual recognition that the deceased’s distributions were reduced by the deceased member accepting lesser distributions for several years before he died.  The court then reversed the judgment against the LLC.

Afterwords:

A former LLC member’s estate has no standing to sue an LLC absent legislative decision to the contrary;

A partnership’s assets and liabilities become those of an LLC upon conversion to the LLC form;

Basic contract formation principles apply when determining LLC members’ rights and duties under an operating agreement.

 

 

Assigning A Breach of Contract Claim In Illinois and The Available Defenses

Contract rights are assigned fairly often, especially in the mortgage loan and credit card contexts.  In the former mortgage scenario, it’s common for a promissory note to be assigned multiple times during the note’s lifespan.  When there’s eventually a note default, it becomes a challenge for the noteholder to trace how it came into the note’s possession.  Repeated note assignments also provide the note maker (person who signed the note) a ready-made defense to a lawsuit based on the note.  The noteholder plaintiff then has the burden of proving to the court that it has the right to sue on the note.

Because assignments are so prevalent and confusion often results as to who can enforce contract rights, it’s important from both plaintiff and defense sides to have a working knowledge of what claims can be assigned and what defenses are available to a a defendant sued by an assignee of a contract claim.

The basics: a person that has a claim against another has a “chose in action.”  Classic examples of a chose in action include a claim for money owed on a debt, a right to stock shares or a claim for damages in tort.  Black’s Law Dictionary 258 (8th ed. 2004)

Choses in action are generally assignable. An assignment transfers title to the chose in action to the assignee, who becomes the real party in interest.  The assignee of the chose in action may then sue on the claim in his or her own name.

An action brought by an assignee is subject to any defense or set-off existing before notice of the assignment is given to the defendant.  735 ILCS 5/2–403(a).  But the set-off or defense must relate specifically to the assigned claim.  It can’t pertain to something extraneous to that claim.

Example, if Company X assigns its 2015 breach of contract claim against Person Y to me and I sue Person Y, Person Y can’t raise as a defense a $1,000 claim Person Y has against Company X from a 2013 contract.  The two contracts are different and involve different underlying facts. Person Y can only defend based on the same 2015 contract Company X assigned.

Puritan Finance Corp. v. Bechstein Const. Corp. 2012 IL App(1st) 112261 illustrates what defenses a defendant has versus a contract claim assignee under the common law and under Article 9 of the UCC.

The plaintiff was the assignee of a bankrupt trucking company (the Assignor) that had previously done business with the defendant.  The Assignor was owed monies by the defendant and assigned its claim to the plaintiff, a secured creditor of the Assignor.

After the plaintiff sued, the defendant asserted defenses based on an unrelated claim it had against the Assignor before the plaintiff’s involvement.  The court granted judgment for the plaintiff after a bench trial for the full amount of its claim (about $22,000) and the defendant appealed.

Affirming the judgment for the assignee, the court first rejected the defendant’s set-off claim under Code Section 2-403(a).  Since the defendant’s set-off involved a contract that was separate from the one being sued on, the defendant couldn’t use this separate contract as a defense to the assignee’s lawsuit.

The defendant’s Article 9 defense was a closer call.  UCC Article 9 governs security interests in personal property as collateral to secure a debt.  Section 9-404(a) of the UCC (810 ILCS 5/9-404) provides that an account debtor can assert against the assignee (1) any defense he (the debtor) had against the assignor “arising from the transaction” giving rise to the assignee’s claim; and (2) any other defense the debtor has against the assignor that accrues before the debtor received notice of the assignment.

Here, the defendant argued that under paragraph (2) of 9-404, it could assert defenses that related to a separate contract between it (the defendant) and the Assignor.  The court disagreed and gave a narrow reading to Section 9-404.

It held that since the defendant didn’t and couldn’t yet file suit against the Assignor before the assignment of the contract to the assignee/plaintiff, the defendant’s claim hadn’t “accrued” within the meaning of Section 9-404.  As a result, judgment for the plaintiff was affirmed.

Afterwords:

– Where a defendant is sued by an assignee of a contract claim, it will be difficult to challenge the claim unless the defendant has claims or defenses against the assignor that are transactionally related to the assigned claim.  If the defendant’s defense relates to a separate, unrelated transaction, the defense or set-off will likely fail;

– Under Section 9-404, a defense “accrues” where the defendant actually has a viable cause of action against the assignor, such as where there has been a default in assignor’s payment obligations, instead of just a bare claim that a defendant is owed money on an unpaid invoice.

Summary of Business Records Allowed Into Evidence In Ponzi Scheme Claw-back Hearing – 11th Cir.

The interplay between Federal Rules of Evidence 1006 (summaries) and 803(6)(business records) is examined by the 11th Circuit Court of Appeals in In re International Management Associates, LLC, 2015 WL 1245503 (C.A.11 Ga.), a case where a trustee was able to admit a summary of bulky business records into evidence and avoid a $200K transfer from the debtor and Ponzi scheme operator (IMA) to the investor defendants.

(A Ponzi scheme typically involves a business entity that doesn’t really operate any legitimate business and that uses the principal investments of newer investors to pay older investors.  In reality though, the investors are being paid their own principal or that of other investors.)

The defendants in the IMA case received over $600K in payouts from IMA over a several-year period.  IMA’s trustee sought to avoid (recover) the most recent $200K payment to the defendants.

At the hearing, the trustee offered summaries of the debtor’s business records in evidence to support the avoidance claim.  The bankruptcy court allowed the summaries into evidence and entered judgment for the trustee.  The Georgia district court affirmed and the defendants appealed to the 11th Circuit on the basis that the summaries should have been excluded since the underlying records weren’t authenticated or offered into evidence at the hearing.

Held: affirmed

Q: Why?

A: Federal Rule of Evidence 1006 allows a “summary, chart or calculation” to be used in evidence to prove the content of voluminous writing (or photographs or recordings) that can’t be conveniently reviewed by the court.

The main qualification is that the actual records underlying the summary must be made available to the opponent for copying and examination.  The summary evidence proponent doesn’t have to offer the underlying documents into evidence but he must establish that those documents would have been admissible in evidence if he did offer them.  FRE 1006.

To make the requisite showing for admissibility under Rule 1006, the person offering the summary must establish that the underlying documents are authentic and meet the requirements for admissibility as business records under FRE 803(6) – the business records rule.

The authenticity burden is light.  All the proponent must show is that the documents are what they appear to be and he can do this through the testimony of a witness who is knowledgeable about the documents.

To meet the business record admissibility test under FRE 803(6), the offering party must show (1) that the record was made at or near the time by – or from information transmitted by someone with knowledge; and (2) the record was kept in the course of a regularly conducted activity, and (3) making the record was a regular practice of a given business.  FRE 803(6)(A)-(C).

A qualified witness to testify on business records is one who can explain the system of record keeping utilized by a business.  He does not have to have firsthand knowledge or be the author of the records, though. As long as the movant establishes enough circumstantial evidence to show the documents are trustworthy, the record can be admitted in evidence.

Here, the court found that the trustee’s evidence summary was supported by trustworthy business records.  While the trustee didn’t author or maintain IMA’s records in the first instance, he engaged in thorough examination and investigation into the records’ preparation and storage and interviewed multiple witnesses who played integral roles in the creation of the underlying records.  The trustee also cross-referenced IMA’s records with those of various financial institutions that did business with IMA.

Considered cumulatively, this was enough circumstantial evidence for the court’s avoidance judgment for the trustee.

Take-aways:

– Summaries of business records are admissible where the underlying documents are voluminous and are themselves admissible as business records under FRE 803(6);

– A witness testifying as to business records doesn’t have to be the creator of a given record.  It’s enough that the witness is familiar with a company’s process utilized to create and store the records in question;

– the more meticulous a third party’s (like a trustee or receiver) efforts are to verify the accuracy of business records, the more likely that third party can defeat a hearsay objection at trial or hearing.

 

Lost Profits and the ‘New Business Rule’ – A Case Snapshot

The Northern District of Illinois recently denied a foreign truck parts supplier’s claim for lost profits in a contract dispute involving an Illinois-based global truck manufacturer.  In doing so, the court expansively applied the “new business rule” to the plaintiff despite its forty-year history in the automotive parts industry.

In Clutch v. Navistar, 2015 WL 1299281 (N.D.Ill. 2015), the plaintiff parts supplier sued the manufacturing giant for breaching an agreement to help plaintiff unload a multi-million dollar surplus of clutches that plaintiff made for the defendant under a cancelled supply contract.  The plaintiff alleged that defendant didn’t adhere to its promise to help plaintiff market the unsold clutches.

The court granted summary judgment for the defendant since the plaintiff failed to prove damages under Illinois contract law.

The reasons:

An Illinois breach of contract plaintiff must show (1) the existence of a contract, (2) performance by the plaintiff, (3) breach by the defendant and (4) resulting damages.

Damages don’t have to be shown with laser-like precision.  Instead, a plaintiff must show a “reasonable basis for computing” the damages and must show lost sales damages to a “reasonable degree of certainty.”  Otherwise, a plaintiff’s recovery is limited to nominal damages (typically, $1).

Lost sales damages generally require expert testimony since those damages usually require “specialized knowledge” derived from detailed financial and marketing analyses.  If a plaintiff offers “lay” lost profits damages testimony (“I would have earned $1 million in sales if the defendant didn’t breach the contract”) without any sufficient foundation for that testimony, the testimony can be excluded under Federal Rule of Evidence 701.

Lost profits are especially hard to prove with new businesses that lack a financial track record with which to gauge estimated profits.  Under the new business rule, a new business or, like here, an established business selling new products, can’t recover lost profits.

In this case, the plaintiff’s procurement director testified via affidavit of the millions in lost profits damages and ancillary expenses.  The court found that the testimony lacked foundation.  The director never conducted a market analysis and failed to provide evidence that established a basis for his lost sales testimony.  As a result, the testimony was viewed as conclusory and stricken by the court.

The court also found that the new business rule defeated plaintiff’s damages.  While plaintiff had a decades-long history in making and selling truck clutches, the specific clutches that were the subject of the suit were a different kind than plaintiff usually makes and sold under a different brand name.  Because the plaintiff hadn’t previously supplied the clutches that were specific to the suit, the court viewed the plaintiff as new and found the plaintiff lacked a sufficient sales history for the clutches to support lost profits damages.

Finally, the court rejected the plaintiff’s claim for over $1M in expenses incurred including inventory, storage and insurance payments for the clutch surplus.  The court viewed these expenses more akin to “ordinary overhead” charges that would have been incurred in the ordinary course of plaintiff’s business.  Since overhead, by definition, is incurred regardless and not the result of a specific contract breach, the plaintiff was precluded from recovering the expense damages.  As a result, the plaintiff’s expenses weren’t imputed to the defendant.

Afterwords:

Even a well-established business can be considered “new” if the particular product or market is one the business hasn’t previously serviced

On summary judgment, the proverbial put up or shut up litigation moment, a respondent must do more than offer conclusory affidavit testimony.  Here, the plaintiff’s principal’s failure to conduct a market analysis for the clutch surplus was fatal to the plaintiff’s breach of contract suit.

Is The Refusal To Give Up Control of a Private LinkedIn Group A Trade Secret Violation? IL ND Weighs In

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When a former media company executive refused to turn over a private LinkedIn group’s contact information, the company responded with a multi-count lawsuit.

In CDM Media USA, Inc. v. Simms, 2015 WL 1399050 (N.D. Ill Mar. 25, 2015), the plaintiff company alleged that the LinkedIn group (the “Group”), which was geared towards high-level IT professionals and administered by the defendant, was company property.  The plaintiff also claimed the Group’s comments threads were competitively valuable trade secrets.

The plaintiff joined a common law misappropriation claim premised on the allegation that the defendant downloaded confidential company data on to his cell phone and refused to return it.

In partially granting the ex-employee’s motion to dismiss, the court considered whether social media content and contacts can qualify for trade secret protection under the Illinois Trade Secret Act.

The LinkedIn Private Group: A Trade Secret? Maybe

The court first considered whether the Group (which contained nearly 700 members) fit the definition of a trade secret under Illinois law.  An Illinois trade secret plaintiff must allege (1) the existence of a trade secret, (2) misappropriation of that trade secret, and (3) that the trade secret was used in the defendant’s business. The Illinois Trade Secrets Act (ITSA) defines “trade secret” to include, among other things, “list of actual or potential customers.” 765 ILCS 1065/2(d).

A key common law trade secrets factor is the time and expense incurred in developing a client base.  The more time and money spent, the better chance of showing a trade secret.

Here, the media company’s allegation that the Group was developed at significant expense over several years and was secret enough to give plaintiff a competitive advantage over rival B2B marketers was sufficient to state a trade secrets claim under the Act for purposes of a motion to dismiss.

The court found that “too little is known” about how the Group was set up, its contents and how it impacted the plaintiff’s business to definitively rule that the Group wasn’t a trade secret as a matter of law.

The Group Communications/Comments: Not A Trade Secret

The court rejected the plaintiff’s trade secrets claim based on the Group comments.  While the court allowed that in some cases a social media group’s communications might qualify as a trade secret, the plaintiff failed to pinpoint the specific Group content that was secret or that gave the plaintiff advantage over the competition.  Because the Group trade secrets allegations were too vanilla, that claim was dismissed.

Defendant’s Cell Phone Data: No Allegation of Use in Business

The plaintiff’s trade secrets claim premised on the allegation that the defendant swiped information from plaintiff’s private database and downloaded it to his cell phone also failed.  Trade secrets misappropriation requires an allegation that defendant actually used a trade secret in his business.  Here, the plaintiff failed to allege that defendant used any of the cell phone data in the course of his current employment.

Lastly, the court found the plaintiff’s “inevitable disclosure” allegations to sparse to be actionable.

Under the inevitable disclosure rule, a trade secrets claim will succeed if the plaintiff shows the defendant can’t function or operate in his new job without relying on the plaintiff’s trade secrets.  Here, the plaintiff failed to allege any facts to support his bare-bones assertion that defendant would inevitably disclose plaintiff’s trade secrets to defendant’s new employer.

Afterwords:

Post-worthy for its modeling of some creative lawyering: trade secrets law isn’t the typical legal theory of choice in a dispute over who owns a private social media account;

If a private social media group is secret enough to give an employer a competitive advantage and was developed over a lot of time and expense, the group can qualify as a trade secret;

Even under Federal notice pleading, a plaintiff must allege use in business to establish misappropriation and must give some specifics to support an inevitable disclosure theory.

Denial of Motion to Disqualify Counsel Doesn’t Bar Later Legal Malpractice Suit- No Issue Preclusion (IL ND)

Eckert v. Levin, et al., 2015 WL 859530 (N.D.Ill. 2015), a case I featured earlier this week, gives some useful guidance on when collateral estoppel or “issue preclusion” bars a second lawsuit between two parties after a judgment entered against one of them in an earlier case.

The case’s tortured history included the plaintiff getting hit with a $1 million dollar judgment in 2012 as part of  a state court lawsuit after he breached a 2010 written settlement agreement orchestrated by the defendants – the lawyers who represented plaintiff’s opponent in the state court case.

In the state court case, the plaintiff moved to disqualify the lawyer defendant and later, to vacate the $1 million judgment.  Both motions were denied.

In the 2014 Federal suit, the defendants (the individual lawyer and his Firm) moved to dismiss the plaintiff’s legal malpractice claim.  They argued that the state court’s denial of the plaintiff’s motion to disqualify defendants as counsel was a tacit ruling that the defendants didn’t commit malpractice.  Defendants contended that the plaintiff was collaterally estopped from bringing a legal malpractice claim in the 2014 Federal case since he lost his earlier state court motion to disqualify defendants as counsel for the plaintiff’s opponent.

The court disagreed and denied the motion to dismiss.  It held that issue preclusion didn’t apply since a motion to disqualify involves different issues than a legal malpractice claim.

Issue Preclusion, Legal Malpractice, and Motions to Disqualify

Issue preclusion applies if (1) the issues decided in the before and after cases are identical; (2) there was a final judgment on the merits in the first case; (3) the party against whom estoppel is asserted was a party or in privity with a party to the first case; prior and (4) a decision on the issue must have been necessary for the judgment in the first case.

Collateral estoppel also requires the person to be bound must have actually litigated the issue in the first suit.  Like res judicata, the rationale for the issue preclusion rule is to bring lawsuits to an end at some point and avoid relitigation of the same issues ad nauseum.

In Illinois, to prevail on a legal malpractice suit, a plaintiff must show: (1) an attorney-client relationship giving rise to a duty on the attorney’s part; (2) a negligent act or omission by the attorney amounting to a breach of that duty; (3) proximate cause establishing that but for the attorney’s negligence, the plaintiff would have prevailed in the underlying action; and (4) actual damages.

A motion to disqualify counsel has different elements than a malpractice claim.  A disqualification motions require a two-step analysis: the court must consider (1) whether an ethical violation has occurred, and (2) if disqualification is the appropriate remedy.  The main rules of professional conduct that usually underlie motions to disqualify are Rules 1.7, 1.9 (conflict of interests to current and former clients) and 3.7 (lawyer-as-witness rule).

The court held that since the elements of a legal malpractice claim and a motion to disqualify don’t overlap, plaintiff’s legal malpractice wasn’t barred by the earlier motion to disqualify denial.

Non-Reliance Clause in Settlement Agreement

The court also rejected the defendants’ argument that the 2010 settlement agreement’s non-reliance clause (which provided that plaintiff wasn’t relying on any representations in connection with signing the agreement) defeated the legal malpractice case.  The reason was mainly chronological: the plaintiff’s central legal malpractice allegations stemmed from the attorney defendant’s conduct that occurred after the 2010 settlement agreement.  As a result, the non-reliance clause couldn’t apply to events occurring after the agreement was signed.

Afterwords:

– Issue preclusion doesn’t apply where two claims have different pleading and proof elements;

– a motion to disqualify an attorney for unethical conduct differs from the key allegations needed to sustain a legal malpractice suit;

– a non-reliance clause in a settlement agreement won’t apply to conduct occurring after the agreement is signed.

Tortious Interference And The Corporate Officer Privilege Defense

6030 Sheridan Road, LLC v. Wright Management, LLC, 2011 IL App. (1st) 093282-U examines when a corporate officer is privileged to tortiously interfere with a contract that his company is involved with.

There, the plaintiff real estate developer sued defendants – an LLC property owner and its principal – for tortious interference with business relationship after a planned condominium conversion failed.

The claimed the defendants tortiously interfered with plaintiff’s contracts with a real estate broker and marketing firm of the site.

The appeals court affirmed summary judgment for the defendants.

The tortious interference with contract cause of action stems from the recognition that a person’s business relationships constitute a property interest that should be protected from unjustified interference.

The tort’s elements are: (1) the existence of a valid and enforceable contract between the plaintiff and another; (2) the defendant’s awareness of this contractual relation; (3) the defendant’s intentional and unjustified inducement of a breach of the contract which causes a subsequent breach by the other; and (4) damages. By definition, a party can’t tortiously interfere with its own contract.

A defendant is privileged to interfere with a contract where a corporate officer uses his business judgment and discretion on behalf of his corporation.

This privilege reflects the corporate law axiom that duties owed by corporate officers to their corporation trump their obligations to corporate creditors. (¶¶ 34, 37).

Where a defendant’s conduct is conditionally privileged, the tortious interference plaintiff can overcome the privilege by showing the defendant’s conduct was unjustified or malicious. “Malicious” means conduct that is “totally unrelated” or “antagonistic” to the interest that gives rise to the privilege or that is solely for his own gain or done to harm the plaintiff. (¶ 39).

In Wright Management, the court found for the defendants. Saying that an LLC manager owes comparable duties of loyalty to the LLC as that of an officer to a corporation, the court held the individual defendant was conditionally privileged to interfere with the development contract in to further the LLC’s business interests.

Since there was no evidence that defendant’s dissatisfaction with the real estate broker and the marketing company was pretextual or based on anything other than the quality of their services, the decision to terminate the contracts was a protected business decision.

Since the plaintiff failed to generate evidence to support its claim that the individual defendant acted maliciously when he pulled out of the development agreement, it couldn’t defeat the defendants’ privilege defense. (¶ 44).

Afterwords:

A corporate officer is privileged to interfere with a company contract where he is acting to further a legitimate business interest.

Res Judicata Bars Fraud in Inducement Claim Versus Lawyer Defendant

Eckert v. Levin, 2015 WL 859530 (N.D.Ill. 2015) examines claim preclusion (“res judicata”) in the context of an aborted settlement agreement reached in an earlier state court breach of contract case.

The plaintiff sued the attorney who represented the plaintiff’s adversary in the prior state court case (plaintiff in the Federal case was the defendant in the state case), for fraud in the inducement and legal malpractice.  While the defendant didn’t represent the plaintiff in the earlier state court suit, the plaintiff still sued the defendant for legal malpractice based on his hands-on involvement in crafting a settlement agreement in the state court lawsuit.

But the plaintiff breached the settlement agreement and after the defendant moved to enforce it, a million dollar judgment entered against the plaintiff in the state court action.

The plaintiff then sued in Federal court (there was diversity jurisdiction) on the theory that he was fraudulently induced to sign the settlement agreement that resolved the state court case.  The Northern District dismissed the plaintiff’s fraud in the inducement claim and provided a useful synopsis of the parameters of claim preclusion under Illinois law.

– Res judicata or “claim preclusion” prevents the relitigation of claims or defenses that were or could have been brought in a prior case;

– The doctrine seeks to encourage finality in litigation that sometimes seems to drag on interminably.  

– The three requirements for res judicata are (1) a final judgment on the merits; (2) an identity of cause of action (between the first and second suits); and (3) an identity of parties or their privies;

– For element (2) – the identity of cause of action requirement – Illinois applies the “transactional test”, which looks at whether the first and second cases stem from a “single group of operative facts”;

– Drilling down further, this single group of operative facts test looks at whether the facts underlying the first and second cases are related in time, space, origin or motivation, whether it’s convenient to try the cases together, and whether trying the cases as a single unit is congruent with the parties’ expectations and established business practices;

– The person against whom res judicata is invoked must have had a “full and fair” chance to litigate the claim in the earlier case.

*2

The Northern District found all res judicata elements were met.  There was a final money judgment on the merits in the state court suit.  Additionally, there was an identity of parties between the two cases since the attorney defendant in the Federal case represented the plaintiff in the state court case and so was clearly in privity with plaintiff (the defendant attorney’s interests were clearly aligned with the state court plaintiff’s).

The closest call was the identity of cause of action prong.  The court found that since the plaintiff in the Federal case sought the same relief – invalidation of the settlement agreement – as he could have in the earlier state court case, there was sufficient congruity between the respective claims in the state and Federal suits.  According to the court, the plaintiff clearly could have asserted fraud in the inducement as grounds for invalidating the state court settlement but failed to.

Take-aways:

This case serves as a good reminder to assert all possible claims in litigation.  Otherwise, you run the risk of having your claim or defense barred in a later case.

The case also provides a good illustration of how vague and malleable the transactional test (for determining whether there is res judicata identity of cause of action between two cases) is.  A court will look to the nature of a claim, not its title, when determining when two differently named causes of action (e.g. negligence, breach of contract) are considered to derive from the same underlying facts and therefore meet the same cause of action test.

 

An Enigma Wrapped Inside A Conundrum: Suing the LLC in Federal Court – How Hard Can it Be?

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A limited liability company (LLC) is generally lauded as a flexible business entity that provides the limited liability of a corporation with the tax attributes of a partnership (flow-through, not double, taxation).

Flexibility is another oft-cited hallmark of the LLC form as its members can be one or more individuals, corporations, partnerships or even other LLCs. It’s common to see LLCs that have several other LLC members that are in turn comprised of (still more) LLC members.  With multiple layers of LLC members, tricky jurisdictional issues routinely abound.

When Federal subject matter jurisdiction is at stake, the question of whether a plaintiff can sue an LLC in Federal court quickly morphs from an academic, “fun” one, to an important strategic one.

Here are some useful bullet-points:

– A Federal district court has original subject matter jurisdiction over matters involving citizens of different states and the amount in controversy exceeds $75,000. 28 U.S.C. s. 1332(a)(1).

– There must be “complete diversity” between the parties: each plaintiff must be a citizen of a different state than each defendant.  The easily parroted rule becomes hard to apply the more parties are involved in a given lawsuit; especially where business entities are implicated in a case.

– A corporation is considered a citizen of the state where it has its principal place of business and where it is incorporated.  So, if Corporation X was incorporated in Texas but has its main office in Ohio, Corporation X would be considered a citizen of both Ohio and Texas.  28 U.S.C. s. 1332(c)(1).

– An LLC is considered a citizen of the state of its members;

– An LLC can have as members, partnerships, corporations and other entities;

– When an LLC has multiple members that have varied citizenships, a court must examine each member’s state of citizenship, as well as each member’s members’ citizenship, when determining whether it has jurisdiction over an LLC defendant.

A Case Illustration

Cumulus Radio Corp. v. Olson, 2015 WL 1110592, a case I’ve twice featured for its discussion of Federal TRO guidelines, illustrates the serpentine analytical framework involved with an LLC that’s made up of one or more LLC members.

There, the plaintiff broadcasting company was a Nevada corporation with its principal place of business in Georgia.  The defendant LLC was a Delaware-registered LLC based in Oregon.  The defendant LLC had but one member that happened to be another LLC.  That LLC (the sole member of the defendant LLC) had a single member – an individual who lived in Georgia.

Because the Delaware LLC’s sole member’s sole member was a Georgia resident, there was incomplete diversity between the plaintiff and defendant.  Normally, this would give the defendant a basis to move to dismiss the complaint for lack of subject matter jurisdiction.  The plaintiff would then have to sue the LLC defendant in state court in Delaware (where it was formed) Oregon (where it is based) or Georgia (where its member’s member lived).

While the court ultimately found that the Georgia resident wasn’t truly a member based on the LLC’s Operating Agreement, Cumulus provides a good illustration of the multi-layered jurisdictional analysis required with an LLC defendant that has several individual or business entity constituents.

Sources:

– Hicklin Engineering LC v. Bartell, 439 F.3d 346 (7th Cir. 2006);

– 28 U.S.C. s. 1332(a), (c).

– http://www.insidecounsel.com/2013/09/12/litigation-carefully-examine-the-layers-of-llc-cit (this is a good article from 2013 that lays out the applicable rules)

No Consumer Fraud Where Deceptive Act Doesn’t Actually Reach Plaintiff: Cabbie’s Crash Damages Case Gutted – IL ND

The economic loss doctrine bars a plaintiff from recovering certain money damages under a tort theory (e.g. negligence, products liability, property damage, etc.) where a contract defines his relationship with a defendant.

“Economic loss” means (i) damages for inadequate value, (ii) costs of repair and replacement of the defective product, (iii) loss of profits (without any claim of personal injury or damage to other property) or (iv) the diminution in the value of the product caused by its defect.   (http://paulporvaznik.com/the-negligent-misrepresentation-exception-to-economic-loss-rule-the-information-v-tangible-product-dichotomy/2849).

The rule aims to keep a clear line of demarcation between breach of contract and tort law and remedies.  

Kesse v. Ford Motor Company, 2015 WL 920960 (N.D.Ill. 2015) examines the economic loss doctrine through the lens of a products liability suit involving the crash of a taxi cab.

The plaintiff cab driver claimed his cab suddenly accelerated and wouldn’t stop, requiring the driver to swerve into a roadside pole to avoid hitting oncoming traffic.  After hitting the pole, the cab struck and killed a pedestrian.

He sued the car maker alleging various design defects that caused the cab to accelerate without warning and that lacked a brake override system. The driver joined a consumer fraud claim against the automotive giant.

In addition to his personal injuries, the plaintiff sought damages for (i) lost income (his license was suspended after the accident), (ii) for lease payments he made to use the cab under the assumption it was defect-free, and (iii) damages for time and expense defending criminal charges brought by the State of Illinois in the wake of the fatality.  The defendant moved to dismiss plaintiff’s claims.

Gutting much of the plaintiff’s damage claims,  the court found that most of the claimed damages easily qualified as economic loss that can’t be recovered in a products liability (tort) suit.

The court rejected plaintiff’s argument that the crash was a “sudden and calamitous occurrence” and therefore, the economic loss rule didn’t limit plaintiff’s damages.

This exception to the economic loss rule applies where an occurrence is highly dangerous and presents a likelihood of personal injury or injury to other property (not the property involved in the occurrence).  Typical examples include fires and explosions.  

The court gave the sudden and calamitous occurrence exception a cramped application.  It held that even if the crash was considered a sudden  and calamitous occurrence, the plaintiff could still only recover for damage to other property (i.e. not the cab itself).  Since the plaintiff didn’t allege damage to other property, the sudden and calamitous occurrence exception didn’t apply.

The plaintiff’s consumer fraud claim, premised on Ford not disclosing safety risks associated with the car, also failed.

An Illinois consumer fraud act claimant must show (1) a deceptive act or practice; (2) the defendant intended for the plaintiff to rely on the deception; (3) the deceptive act occurred in the course of trade or commerce; (4) actual damage to the plaintiff; and (5) damages to the plaintiff proximately caused by the defendant.  *3.

A consumer fraud claim fails where the deception doesn’t actually reach the plaintiff, though.  Where a plaintiff isn’t the direct or indirect recipient of deceptive communication from a defendant, such as through advertising, the plaintiff can’t establish that the defendant was the proximate cause of the plaintiff’s injuries.

Here, the plaintiff failed to allege a deceptive act by Ford or that any false statement of Ford actually reached the plaintiff.  As a consequence, the court dismissed the consumer fraud count.

Take-aways:

Sudden and calamitous occurrence only applies where the precipitating event damages property other than the defective product involved in the occurrence;

A consumer fraud plaintiff must prove that he actually read, heard, or received a deceptive act or false statement in order to show proximate cause – that his damages were caused by a deceptive act.

 

Federal TRO Practice – The Legitimate Interest, Near-Permanence and Balance of Harms Test: Cumulus v. Olson – Part II of III

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Cumulus Radio v. Olson, 2015 WL 643345 also discusses the legitimate business interest test, what constitutes an adequate remedy at law and the balance of harm elements of injunctive relief under Illinois law.

To determine whether a given restrictive covenant is reasonable, the court examines whether (1) the plaintiff has shown a legitimate business interest, (2) the restrictive covenant imposes an undue hardship on the employee; (3) the restriction injures the public, and (4) the time (how long?) and territory (how far?) limits of the restriction.  Illinois courts recognize that radio stations have a valid business interest in its customers given the highly competitive nature of broadcasting.  *7.

In assessing prong (1) – a legitimate business interest – the court considers whether a business has a “near permanent” relationship with its customers and advertisers who fund the broadcast by buying radio ads.  

The near-permanence inquiry distills to seven factors: (1) permanence of the relationship, (2) the amount of money invested to acquire clients, (3) the degree of difficulty in acquiring clients, (4) the extent of personal customer contacts by the employee, (5) the extent of the employer’s knowledge of its clients, (6) the duration of the customer’s activities with the employer; and (7) the intent to retain the employer-customer relationship.

The court examined these factors and found that the plaintiff radio station showed a near permanent relationship with its customers.  Illinois law recognizes that radio stations have a protectable interest in the near permanence of their customers as the plaintiff offered evidence that showed how time-consuming, expensive and arduous it is to cultivate clients.  

The plaintiff’s testimony that the radio industry is largely relationship-driven and that many of plaintiff’s clients were long-time customers also swayed the court.

The plaintiff also showed an inadequate remedy at law; meaning, money damages wouldn’t fix the defendant’s mon-compete breach.  Where a plaintiff can pinpoint specific lost accounts, money damages are the proper remedy; or “adequate.”  Here, though, plaintiff had difficulty identifying which contracts the plaintiff lost to the competing station.  This made it impossible to quantify plaintiff’s damages.

The closest call was the balance of harm element – the harm resulting from the injunction weighed against its benefit.  The harm here to the defendants was palpable and severe.  The sales executive was enjoined from working for the competing station in his chosen profession for a period of six months (from the entry of the injunction) and within a 60 mile radius.  He was also forbidden from soliciting any of plaintiff’s customers with whom he had contact for a 12 month period.  

The radio station defendant suffered harm, too.  It lost the benefit of a $250K/year salesman’s services for the duration of the non-compete term.

But the court found the benefit to the plaintiff outweighed the harm to the individual defendant.  It noted that if it denied plaintiff’s injunction request, the employment contract signed by the defendant would be meaningless and the plaintiff would face the prospect of untold lost clients due to the defendant’s clear breach of the non-compete provision.

Takeaways:

– The more time, effort and money a plaintiff can show goes into developing clients, the better his chances of showing near permanence and getting injunctive relief;

– money damages won’t properly compensate a plaintiff who can’t specify lost accounts flowing from a non-compete violation;

– upholding the clear language of a contract can trump an employee’s right to earn a living if the violation is blatant and the restrictions are reasonable. 

 

“Will It Play in Peoria?!”: Fed. Court Casts Doubt on Continued Vitality of ‘Two – Year Rule’ to Enforce Non-Compete

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Fifield v. Premier 2013 IL App (1st) 120327 is (was?) an important case in employment law circles for cementing the “two year rule”: two years of continuous employment is the bare minimum length of at-will employment required for an employer to enforce a restrictive covenant.

From the employer’s vantage point, the rule was troubling since it gave the employee all the leverage: he could leave a job at any time before he reached the two-year mark regardless of whether he signed a non-compete.

About two years later, Prairie Rheumatology Assocs. v. Francis, 2014 IL App (3d) 140338 followed Fifield but with a twist: it considered whether an employer could elude the two-year rule if by offering am employee an additional benefit (e.g., training, marketing support, bonus payments, etc.) beyond continued employment.  Still, the court in that case nullified the non-compete since the doctor defendant decamped less than two years  of her hire date.

Enter Cumulus Radio Corporation v. Olson, 2015 WL 643345 (C.D.Ill. 2015), a Federal case that examines whether the two-year rule is inexorable in the context of a radio station’s injunction suit against a competitor in the Peoria, Illinois market.

The plaintiff sued its former account executive and his new employer, a competing station, for violating restrictive covenants contained in an employment contract signed by the executive.  The contract contained a six-month/sixty mile non-compete term and a 12 month non-solicitation and non-disclosure term.  The non-solicitation clause barred the executive from contacting certain of plaintiff’s customers (radio advertisers) for 12 months after he leaves.

The plaintiff resigned 21 months into his tenure with plaintiff and began working for the competitor just two days later.  The plaintiff sought a temporary restraining order (TRO) preventing the executive from working for the competitor for the duration of the non-compete term.  The Southern District granted in part and denied in part the plaintiff’s TRO request.

Under Federal Rule of Civil Procedure 65, a TRO plaintiff must show that (1) he will suffer immediate, irreparable injury; (2) a likelihood of success on the merits; and (3) lack of an adequate remedy at law.  If the plaintiff makes the required showing on elements (1)-(3), the court then balances the relative harms to the parties and the public if the TRO is granted.  *2.

On the breach of contract count – alleging the executive breached all the restrictive covenants – the court found that the executive’s 21-month tenure with the plaintiff was sufficient consideration to support the non-compete.

The court refused to rigidly apply Fifield and “predicted” that Illinois’ Supreme Court would apply a more flexible test than the dogmatic two year rule.

For support, the court pointed to two  recent Northern District decisions that rejected the two-year rule in favor of a more fact-specific and flexible test.  The reason, according to the court, was that if the two-year test is formulaically applied, restrictive covenants would be rendered illusory and voided at the “whim of the employee.” (**4-5).

In finding that employing the executive’s for a 21-month term was adequate consideration to support the restrictive covenants, the court found that the plaintiff showed a likelihood of success on the merits on its TRO claim that the executive breached the employment contract.

Takeaways

Significant in that it’s another Federal court casting doubt on the continued vitality of the two-year rule.  Practitioners who are seeking to enforce restrictive covenants where the underlying employment length didn’t reach two years, now have three District court cases – two from the Northern, one from the Southern – that show a willingness to depart from the two-year rule.

 

 

Guest Post: Do Attorney Liens Attach to ESI Hosted by E-Discovery Vendors

This is a guest post from Chad Main of Percipient, an e-discovery and legal technology company focused on managed document review.

A recent opinion from the Illinois First District of Court of Appeal, Cronin & Company, LTD. v. Richie Capital Management, LLC, 2014 IL App. 131892-U (unreported), raises interesting questions about attorney liens, client files, e-discovery and the Rules of Professional Conduct. In Cronin, the court held that an attorney’s retaining lien (a lien used to secure payment of unpaid legal fees), attached to electronically stored information (ESI) hosted by an e-discovery vendor in Relativity, an e-discovery software platform. The court noted that although retaining liens attach only to documents actually possessed by the attorney asserting the lien, it encompassed ESI hosted by the vendor because the vendor acted at the direction of the attorney and therefore, the vendor’s possession of the electronic data was imputed to the attorney. As discussed below, in states that permit them, retaining liens are a helpful tool for attorneys to secure outstanding fees, but attorneys must also be mindful of the tension between the right to recover fees and the Rules of Professional Conduct.

Types of Attorneys Liens Available to Recover Fees

In Illinois, attorneys may assert two types of liens against former clients to ensure payment of outstanding fees. The first is a charging or, special lien governed by the Illinois Attorney’s Lien Act, 770 ILCS 5/1, which attaches to the recovery in the case for which the attorney is retained. The second type of lien, and the kind asserted in Cronin, is a retaining lien. A retaining lien enables an attorney to retain a client’s files, money and property possessed by the attorney until outstanding fees are paid. Upgrade Corp. v. Michigan Carton, Co., 87 Ill. App. 3d 662 (1st Dist. 1980).

Retaining liens are generally passive liens and enforceable only to defend against an action by the client seeking return of the property. Retaining liens continue until: 1) payment of outstanding legal fees; 2) the client posts adequate security for payment of unpaid fees; or 3) the attorney surrenders possession of the withheld property. Twin Sewer & Water, Inc. v. Midwest Bank & Trust, Co., 308 Ill. App. 3d 662, 644 (1st Dist. 1999). However, an attorney’s right to a retaining lien is not absolute and courts may order the release of client property if equity or fairness warrants. Upgrade, 87 Ill. App. 3d at 664.

Tension Between Attorney Liens and The Rules of Professional Conduct

Although attorneys may be permitted to assert liens over client property, they must be aware of ethical obligations relating to client files. As noted by Seventh Circuit in Johnson v. Cherry, 422 F.3d 540, 555 (7th Cir. 2005):

As a general matter, a lawyer’s ethical duties to her client do not preclude an attorney from invoking her retaining lien in furtherance of her right to compensation. See Ill. Rule of Professional Conduct 1.8(i)(1); see also American Bar Association’s Model Rules of Professional Conduct 1.8(i)(1), 1.16(d) (2000). This is not to say that retaining liens are beyond criticism. See John Leubsdorf, Against Lawyer Retaining Liens, 72 Fordham L.Rev. 849 (2004) (urging abolition of retaining lien). But the lien has been recognized and enforced in Illinois for more than 100 years. See Sanders v. Seelye, 128 Ill. 631, 21 N.E. 601, 603 (1889).

One of the main tensions between attorney liens and the Rules of Professional Conduct is found in Rule 1.16 which governs the termination of client relationships. Jim Doppke, former senior litigation counsel for the Illinois Attorney Registration and Disciplinary Commission, and now with Chicago’s Robinson Law Group cautions that “Rule 1.16 requires attorneys to take all steps ‘reasonably practicable’ to protect a client’s interest” and in some circumstances holding back client files, such as e-discovery materials, could prejudice a client.

So, what should an attorney do who wants to assert a retaining lien against the client’s file? Doppke says the first step should be negotiation of the outstanding fees and to make sure negotiations are in writing. “[Attorneys] definitely want to communicate ‘on the record’ with the client or new counsel because if the dispute is brought to the attention of the ARDC, often one of the allegations against the attorney is inadequate communication with the client.” Doppke says that attorneys should “surrender all paper and files to which the client is entitled,” but notes that lawyers may retain any documents as permitted by law. However, Doppke notes that “what the client is entitled to” is admittedly vague and absent a court order, is often determined by subjective factors.

Attorneys may not be completely without guidance. The federal court for the Northern District of Illinois addressed the issue of attorney liens and a client’s right to property in Lucky-Goldstar Intl. (America), Inc. v. International Mfg. Sales Co., Inc., 636 F. Supp. 1059 (N.D. Ill. 1986). What a client is entitled to, observed the court, “begs the question. If the attorney is properly asserting the retaining lien, the client is not entitled to the property” and therefore, rules of attorney discipline are inapplicable. However, the court acknowledged the tension between an attorney’s right to assert retaining liens and a client’s right to property, but noted that neither was absolute. A court faced with a dispute over an attorney’s retaining lien “should be to provide access to the documents necessary without prejudicing the rights of either party to a controversy [over attorneys fees].” The court counseled attorneys to consider:

  • the client’s financial situation;
  • the sophistication of the client in dealing with lawyers;
  • the reasonableness of the fee;
  • whether the client clearly understood and agreed to pay;
  • whether imposition of the retaining lien would prejudice the important rights or interests of the client or others;
  • whether failure to impose the lien would result in fraud or gross imposition by the client, and
  • whether there are less stringent means to resolve the dispute.

Bottom line, Doppke says, is that the attorney must “keep an eye on the ball of what the client needs to go forward with the case” and not withhold those documents. This could be especially true in matters with significant e-discovery because a bulk of the case material could be electronic documents. As noted, one solution is requiring the client to post security for the unpaid fees as suggested by the court in Upgrade. This protects both the client’s ability to prosecute or defend a case and the attorney’s interest in unpaid fees.

 

Piercing the LLC Corporate Veil: Publicly-Traded Parent Corp. Is Responsible for Controlled LLC’s Debts – Wyoming Court

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An ill-fated wind turbine project in Southeast Wyoming sets the unlikely stage for a court’s encyclopedic corporate liability history lesson.  In Greenhunter Energy, Inc. v. Western Ecosystems Technology, Inc., 2014 WY 144, 337 P.3d 454 (Wyo. 2014), the Wyoming Supreme Court traces the evolution of the corporate form (and later, the equitable piercing the corporate veil remedy), from its pre-Biblical origins through the modern day where the limited liability company is the business vehicle of choice for start-ups and entrepreneurs across the country.

The plaintiff got about a $44K judgment against an LLC defendant  for consulting work the plaintiff did as part of a wind turbine development.  In post-judgment discovery, the plaintiff learned that the LLC was controlled in every way by its parent company – a publicly-traded entity – who decided what LLC creditors would and wouldn’t be paid.

The plaintiff then added the corporate parent as a defendant and the lower court pierced the LLC’s veil of protection and found the parent company responsible for the judgment.  Affirming the piercing judgment, the Wyoming Supreme Court held:

– the cardinal features of an LLC are limited liability and flexibility.  LLC’s have the personal liability protections of a corporation with the taxation benefits of a partnership (no “double taxation” at entity and personal levels, e.g.);

– Wyoming’s LLC Act provides that a failure of an LLC to observe corporate formalities isn’t enough to impose liability on LLC members or managers for LLC obligations (Wyo. Stat. Ann. s. 17-29-304).

– although Wyoming’s LLC Act provides that LLC members aren’t responsible for an LLC’s debts, an LLC’s veil of limited liability can be pierced where there is a unity of interest between the LLC and a dominating person or entity, and where recognizing corporate existence will lead to injustice or sanction a fraud;

– A Wyoming LLC can be pierced not only where there is actual fraud (misrepresentation of fact, scienter, reliance, damages, e.g.) but also where there is constructive fraud – conduct that doesn’t rise to the level of (intentional) fraud but is treated the same because of its similar harmful consequences;

– Two key factors involved in the piercing equation include undercapitalization and commingling: the degree to which a business is intermixed with the affairs of its member;

– No single factor is determinative on its own and the court’s piercing calculus is fact-driven.

(¶¶ 12-33)

The defendant and the LLC were separate entities and had separate bank accounts. Still the court upheld the lower court’s piercing of the LLC’s corporate veil to bind the defendant.

The undercapitalization factor weighed heaviest in the court’s analysis.  There is no magic capital infusion number that equals adequate capitalization.  The court noted that over a several-month period during the time plaintiff was submitting bills to the LLC, that it (the LLC) had a zero bank balance and that the defendant dictated what bills the LLC would and wouldn’t pay.

Since the LLC was continually unfunded by choice instead of by external market forces, the LLC was inadequately capitalized.  (¶¶ 40-43).

The court also found that the LLC and its corporate parent intermingled their business and finances.  Key facts cited by the court included: (i) the same accountants managed both the LLC’s and the defendant’s finances; (ii) the LLC didn’t have any employees.  Instead, defendant’s employees negotiated and inked contracts for the LLC; (iii) the LLC had no revenue separate from the defendant and the defendant used the LLC to “pass through” funds for bill payment; and (iv) the defendant claimed tax deductions for the LLC’s business without assuming responsibility for any of the LLC’s debts.  

In short, the defendant enjoyed all the benefits of an LLC without also shouldering the responsibility for its operation.  (¶¶ 44-45).

Q: But Shouldn’t the Plaintiff Have Gotten A Guaranty?

The defendant’s last argument was that the plaintiff should have protected itself by insisting on a guaranty from the corporate defendant.  The court rejected this, noting that the “reality of the marketplace” is that companies like the plaintiff are often in a competitively vulnerable position compared to large corporations like the defendant and lack the leverage to require a guaranty from the corporation.

Taken together, these factors led the to find the conditions ripe for piercing and held the defendant responsible for the judgment.

Afterwords:

A significant opinion for its exhaustive analysis of piercing litigation with a special focus on piercing an LLC.;

Piercing was allowed here even though there was no finding of actual or constructive fraud and where Wyoming’s LLC Act specifically provides that LLC members are not liable for LLC debts;

Time will tell whether this case and others like it will embody a major change in corporate liability law making it easier to pierce the veil of limited liability where a dominant entity controls a weaker, affiliated one.

A special thanks to Robert Ansell of Silverman Acampora (Jericho, NY) for alerting me to this
[email protected]

 

Attorneys’ Liens, Contingency Fee Agreements and Quantum Meruit Recovery – An Illinois Case Note

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In a prior post (http://paulporvaznik.com/tag/retaining-lien), I discussed the common law retaining lien, which allows an attorney to keep a client’s papers and property as security for the payment of past due fees.  Another legal device at a lawyer’s disposal to encourage payment is the statutory attorneys’ lien, codified in Illinois at 770 ILCS 5/1.

Grane v. Methodist Medical Center of Central Illinois, 2015 IL App (3d) 130003-U, considers the attorneys’ lien remedy where a client fires his attorney, hires someone else and later rakes in big bucks in a settlement.

The personal injury plaintiff entered a written contingency fee agreement with a law firm (Law Firm 1) whom he (the plaintiff) later fired before hiring new counsel (Law Firm 2).  Law Firm 1 served a written notice of its attorneys’ lien on the defendant hospital while it still represented plaintiff.

When the suit settled for several million dollars, Law Firm 1 sought to recover pursuant to the 30% recovery contingency fee contract.  The trial court agreed and awarded Law Firm 1 nearly $600K: 30% of the total fee award.  Law Firm 2 and plaintiff appealed.

Held: Reversed.

Q: Why?

A: To collect fees under the Illinois Attorney Lien Act, 770 ILCS 5/1, the attorney must file a petition to adjudicate her lien.  A prerequisite to filing a lien petition is that the attorney must have been hired by the client to assert a claim and the lien must have been “perfected.”

To perfect an attorney lien, the claimant must serve notice in writing of his lien upon the party against whom her client has a claim.  The lien may be served by registered or certified mail.

The lien attaches on the date of service of the statutory notice.  An attorneys’ lien must also be perfected during the time there is an attorney-client relationship. (If the attorney waits until after she’s fired to serve the notice, it’s too late.)

When a client fires a lawyer, the fee agreement signed pre-firing is extinguished and no longer exists.  Once that happens, the lawyer’s recourse is to try and recover under a quantum meruit theory: to seek the reasonable value of her services before she was fired.

The quantum meruit factors an Illinois court considers when deciding a fee award include: (1) the skill and standing of the attorney employed, (2) the nature of the case and difficulty of the questions at issue, (3) the amount and importance of the subject matter, (4) the degree of responsibility involved in the management of the case, (5) the time and labor required, (6) the usual, customary fee in the community, and (7) the benefit flowing to the client.  (¶¶ 19-22).

Since the court awarded fees based on a cancelled contingency fee agreement, the appeals court reversed so that the trial court could award the plaintiff’s its fees under the quantum meruit factors.

Takeaway:

The case’s obvious lesson for lawyers is to Track Your Time.  Even in cases where a client isn’t paying by the hour or where it seems unlikely that a fee dispute is likely to ever crystallize.

By keeping diligent time records, the attorney who is fired before a client gets a hefty settlement can show tangible proof of her services and can quantify the dollar value of them.

Lost Profits and the ‘New Business Rule’ – A Short and Sweet One

Aside from delving into some unique issues that crop up in corporate guaranty suits, Williamson Co. v. Ill-Eagle Enterprises, Ltd., 2015 WL 802250, the case I featured yesterday (http://paulporvaznik.com/business-compulsion-duress-and-guaranties-signed-after-the-underlying-contract/7667) also provides some lost profits essentials adapted to a new(ish) business relationship.

In the case, the home decor designer who vends to large retailers (think Bed Bath & Beyond) countersued against the plaintiff foreign manufacturer for lost profits resulting from defective merchandise shipped by the manufacturer.

The manufacturer moved to dismiss the counterclaim on the basis that the designer’s claimed lost profits were speculative since the designer was a “new business” with a sparse profit history.  The court disagreed and posited some key lost profit rules:

– lost profits can be recovered when they’re proven with reasonable certainty – mathematical certainty is not required;

– the plaintiff seeking lost profits must show a reasonable basis for the computation of the claimed damages;

– damages must be shown with reasonable certainty and shown to have been contemplated of the defaulting party at the time the contract was entered into;

– expert testimony is sometimes considered in a lost profits claim but isn’t required;

– the “New Business Rule” (NBR) precludes lost profits recovery for a new or unestablished business since it lacks a financial track record with which to gauge future profits;

– Illinois extends the NBR to both new businesses and new products;

– courts generally permit discovery on lost profits damages before deeming them too speculative;

– If after discovery, the plaintiff can’t show an established market for a given product or business, a lost profits claim will fail.

Here, the plaintiff designer established enough of a track record to permit discovery on the issue of lost profits.  There was a five-year relationship between the wall furnishings  manufacturer and designer wall furnishings as well as a multi-year history of contracts the designer had with “big box” retailers.

As a consequence, the court held it was premature to dismiss the designer’s counterclaim without allowing the designer to take oral and written discovery to support the damages claim.

Afterwords:

The case presents a useful summary of Illinois lost profits basics in the context of a high-dollar/high-sophistication dispute between two commercial entities.

The New Business Rule (NBR) applies to new businesses as well as new products.  However, despite the newness of a given company or enterprise, courts will allow discovery on the lost profits question.  The longer the parties’ contractual relationship, the less likely the NBR will defeat a lost profits claim.

 

Business Compulsion And Economic Duress – Illinois Case Note

In Williamson v. Ill-Eagle Enterprises, Ltd., 2015 WL 802250, a manufacturer of framed art and wall décor sued the New Jersey-based designer of those items and its corporate President (the “Guarantor”) for breach of contract and breach of a written guaranty, respectively.  The guaranty contained a forum selection clause fixing Illinois as the site for any litigation related to the contract and guaranty.

The Guarantor moved to dismiss claiming the guaranty lacked consideration (that is, he didn’t get anything in return for signing the guaranty) and that it was signed under duress. The corporate defendant filed counterclaims which the plaintiff moved to dismiss.

Denying both motions (the Guarantor’s and plaintiff’s motions to dismiss), the court addressed important questions concerning the enforceability of personal guarantees signed after an underlying contract is signed and how specific a claimant must allege lost profits when seeking them as part of its damage claim.  (Part 2 of this post will discuss the lost profits analysis.)

In disposing of the guarantor’s motion to dismiss, the court pronounced these key principles:

– A guaranty that is signed after a contractual obligation already exists is enforceable but only if additional consideration is given to the guarantor;

– A promise not to sue a corporate principal is sufficient additional consideration to support a post-contract guaranty;

– The consideration to support a guaranty doesn’t have to flow directly to the guarantor; instead, a promise to benefit a third party is sufficient;

– Where a party forgoes a claim in good faith, even it ultimately proves invalid, that forbearance is still sufficient to support a guaranty.

Here, the court found that the Guarantor signed the guaranty to avoid the plaintiff suing his company for over $300,000 in merchandise. As a result, the plaintiff’s promise not to sue was sufficient consideration to bind the Guarantor.

Next, the court rejected the Guarantor’s argument that he was coerced into signing the guaranty.  Economic duress, also known as business compulsion, releases a party from a contract who is strong-armed into signing it under duress.

It’s hard to prove duress under Illinois law though.  The duress defense only applies where one is induced by a wrongful act or threat to sign a contract under circumstances that deprive him of his free will.  Hard bargaining or exerting financial pressure isn’t enough to show duress or business compulsion.

The court found the plaintiff at most engaged in hard bargaining by requiring the corporate President’s guaranty.  This was evident by the fact that the corporate defendant owed plaintiff over $300K and was long in arrears at the time the guaranty was signed.

Plaintiff’s chosen business tactic of conditioning future product deliveries on the Guarantor’s promising to pay the corporate debt to the Plaintiff as added security for payment, wasn’t extreme enough to deprive the Guarantor of his freedom of choice, the court said.

Take-aways:

1/ A guaranty signed after the underlying contract is signed is still enforceable if extra consideration is furnished to the guarantor;

/2 A promise to not sue the guarantor’s corporate employer (or affiliate) can be sufficient consideration to support a guaranty;

3/ Economic duress or business compulsion requires more than one party exerting financial pressure on another.  The conduct must be wrongful in the moral sense and eliminate the other party’s free will.

 

 

“But, But I’m So Busy!!” (What To Do When You’re Appointed Counsel in Federal Civil Rights Case – A 10-Step Guide)

I had barely finished congratulating myself on my Federal Trial Bar acceptance when I received a cryptic email from the Northern District’s electronic filing system. The late Judge Hibbler (perhaps the nicest judge I’ve ever been before) had appointed me to represent a pro se plaintiff – an Illinois inmate – in a Section 1983 action against Illinois prison officials and a private health company that staffed the prison.  The plaintiff alleged the defendants were deliberately indifferent to his serious medical condition.

Prior to this, my knowledge of civil rights cases consisted mainly of what I saw on bad Lifetime movies. (Redundant?)  I had a vague memory of Brian Dennehy and Jaclyn Smith frantically trying to secure justice for someone wronged by the system.  (Not to get too tangential here, but is there any Lifetime movie that doesn’t star one or both of them? Tom Skerritt and Valerie Bertinelli (of “One Day At A Time”/Eddie VH fame) seem to figure prominently in the network’s offerings, too.)

Not only had I never litigated a civil rights case, but my personal injury suit experience was correspondingly anemic.  I’d handled a few “soft-tissue-fender-benders” sporadically through the years but that was it.

I also had taken a grand total of one doctor deposition back around the Y2K  era.  All I remember from that painful experience was lots of stammering in front of a decorated surgeon whose ultra-plush office was a shrine to All Things Diploma.  This was going to be uncharted terrain in every way.

Here’s what I did:

1/ Legal Research: I first reviewed the handwritten complaint and the judge’s screening order for clues as to what allegations are necessary to sustain a deliberate indifference claim.  I then researched the pleading and proof elements of section 1983 (42 U.S.C. § 1983) deliberate indifference cases.

Luckily, in addition to Westlaw and Lexis, there are a ton of Internet resources that provide useful primers on Section 1983 suits.  The Prisoner Litigation handbook (http://www.ilnd.uscourts.gov/home/_assets/_documents/2002%20prison%20litigation%20handbook.pdf) also proved valuable.

My legal research focused on the case annotations to the Section 1983 statute and the Prisoner Litigation Reform Act, 42 U.S.C. § 1997e (1994 ed. & Supp. II).   My 7th Circuit and Northern District (IL) case law research honed in on “deliberate indifference” cases.  There are many.

Some of the stand-out features of deliberate indifference suits include:

– No vicarious liability.  If you are suing a prison official, for instance, you must allege specific conduct that he/she participated in.  It’s not enough to say that he/she is the principal of agent staff doctors.  You must allege the official’s active participation in the civil rights deprivation (here, wilfully ignoring a serious medical condition).

– Unconstitutional custom or practice.  If you sue the private contracting entity (prisons often contract with private third parties for medical services), you have to allege an unconstitutional custom or practice – namely, a widespread practice of ignoring serious inmate medical problems – for the entity to be liable for the acts of its agents;

– Med Mal “plus“: A colorable deliberate indifference claim requires allegations and proof that go beyond medical malpractice.  Negligence isn’t enough and neither is a difference of treatment opinion. (“I think the staff Dr. should have done x, y, z instead of only x and y.”)

It’s also not enough to make out a civil rights claim to show that another medical provider would have treated the inmate differently or that the prison medical staff was negligent.  The law requires specific evidence of intentional conduct, recklessness or a knowing failure to act in the face of a clear duty to do so;

– Exhaustion of Administrative Remedies:  A biggie.  The Prisoner Litigation Reform Act (42 U.S.C. ¶ 1997(e)(a)) and the Illinois Administrative Code (20 Ill.Admin.Code ¶ 504.810(b), 850) require an inmate to go through an elaborate grievance procedure where he first submits a claim to a grievance counselor all the way up to an Illinois Dept. of Corrections Administrative Law Judge with some stops in between.

A failure to exhaust the statutory grievance procedure will result in dismissal of a complaint as premature.  I was lucky in the sense that my client was well-versed in the intricacies of the prisoner grievance procedure and he followed the procedures to the letter.  Others aren’t so fortunate.   I see many dispositive motions filed by Section 1983 defendants based on a prisoner’s failure to exhaust his administrative remedies.

– Pacer – the Federal Pacer site also proved valuable. (see https://www.pacer.gov). I can’t tell you how many times I was able to view summary judgment motions and responses filed in deliberate indifference cases that had similar facts and personnel to my case.  Reviewing these on-line briefs gave me insight into what was to come as well as what arguments were likely to survive summary judgment.

After researching and once I was clear on the pleading and factual elements, I moved for leave to amend the complaint.

2/ Helpers and Guides: After I filed the amended complaint, I was contacted by Jim Chapman – a prisoners’ rights attorney who contracts with the Northern District.  He provided me some invaluable prison litigation literature and other resources.

I also attended an all day workshop geared towards pro bono counsel in prisoner suits.  These workshops are held once a month (I believe) at the Dirksen building and are largely attended by pro bono appointed counsel.  Alan Mills of the Uptown People’s Law Center also provided valuable insight and counsel.

Also: if you have an “in” at a large firm, many of them have pro bono departments devoted exclusively to cases like Section 1983/prisoner suits.    Chances are your “Biglaw” counterpart  will have handled a case against the same defendants you have sued.  One person in particular was extremely helpful in sharing deposition outlines, etc.

3/ Prison Litigation Coordinator: A Valuable Liaison. I then contacted the prison litigation coordinator and arranged for a telephone conference with my client.  Everything must be in writing.  You send some proposed dates for a phone call with your client and the coordinator will return a fax to you with the date and time.  You then wait for the (collect) call on the appointed date and time

4/ Client contact (phone): On the scheduled call date, I fielded the collect call, introduced myself and discussed the case.  I asked my client to send me everything – disciplinary reports, grievance documents and medical records

5/ Client contact (in-person visit).  I also found it beneficial to meet in person. Again, I went through the prison litigation coordinator to arrange these visits.  Once there, I met with the client and discussed strategy.  I met with my client two more times; once to prepare for his deposition and another time to prepare for trial.

6/ Discovery: From there, the case proceeds like any other civil case – with written discovery, motion practice and depositions.  I subpoenaed medical records  and produced my client for his deposition, and deposed several defendants and their expert witnesses.

District Court Fund Regulations 1-3 allowed me to offset some of the expert witness expenses the case required.  (http://www.ilnd.uscourts.gov/home/clerksoffice/rules/admin/pdf-orders/General%20Order%2011-0003%20-%20Local%20Rules%20Appendix%20E.pdf); LR 83.36.

These Regulations provide that appointed counsel can seek prepayment of litigation expenses of up to $3,000.  I filed a motion for reimbursement of funds up to this amount and presented it to the court. From there, I took the order to the Clerk’s office and they produced a reimbursement check about a week later.

I also located and named an expert of my own and had him prepare a written report supporting my client’s theory of the case.

7/ Court Hearings: Some judges will bend over backwards to help you when they realize you are appointed counsel.  For others, it won’t matter: You will be held to the same deadlines as your opponent.  So, expect the “look at me! I’m altruistic” excuse for missing a deadline to fall on deaf ears.

8/ Settlement Conference: Expect a referral to a Magistrate judge for a settlement conference.  My client attended by video feed.  The Magistrate did a good job of outlining the strengths and weaknesses to my client directly and discussed the merits of settlement.

9/ Summary Judgment: If the settlement conference doesn’t resolve the case, and mine didn’t,  FRCP 56 and Local Rule 56 take center stage here – just like any other case.  The movant must supply a statement of facts that dictate summary judgment while the respondent must offer its own version of facts that create a triable question of fact.

10/ Trial. We survived summary judgment and the case went to trial.  Jury selection took a long time.

I wanted jurors whom I thought might harbor some animosity towards penal institutions; either based on their personal experiences or those of close friends or family members. The defense, of course, wanted jurors who fit the profile of someone who espoused respect for authority and correctional institutions. There were multiple jurors that fit each demographic and each side made numerous challenges for cause.

Then, just like that, it was time for opening statements.

Afterwords

We settled on day one of the trial.  My client was relieved and very appreciative that he had someone in his corner fighting for him after a lifetime of experiencing quite the opposite.

So – after nearly four years of sometimes acrid litigation with a tough defense firm opponent, I ask myself, Would I Want To Do It Again? Probably not.  The reason is purely economic.  Litigating a civil rights case involving multiple doctors and experts is simply cost-prohibitive; especially if you are a solo practitioner or work for a small firm.  Yes, you can recover fees if you win, but the odds aren’t in your favor on that score.

I saw firsthand the disparity between large law firms and smaller ones in pro bono litigation.  The former have the resources and infrastructure to spare no expense (e.g. they can fly across the country taking depositions) while the latter smaller firms are forced to litigate on a shoestring budget. But that’s a topic for another time.

Putting the financial issue aside, I can say that my appointed counsel case was rewarding both professionally and personally.  It forced me out of my Precious Comfort Zone and I felt I truly helped someone.  The experience tested my limits in terms of legal procedure, substantive law, and logistics and is one I won’t soon forget.

 

 

Default “Orders”, Default “Judgments” And “DWPs” – Illinois Quick Hits

Jackson v. Hooker, 397 Ill.App.3d 614 (1st Dist. 2010) is dated but relevant for its interesting procedural history and nuanced discussion of appellate procedure, the difference between default orders and default (money) judgments and the appropriate time to vacate a dismissal for want of prosecution (“DWP”).

After obtaining an order of default against the defendant, the plaintiff didn’t show up for the prove-up hearing and the case was dismissed for want of prosecution (“DWP’d”). Four months later, the plaintiff moved to vacate the DWP.  The trial court denied the motion and granted the plaintiff leave to file a Section 2-1401 petition to vacate the DWP. Plaintiff did so and the court granted the motion and reinstated the default.

Plaintiff later obtained a $700,000 money judgment after a prove-up hearing. This time, the defendant moved to vacate the judgment. The trial court denied the motion for failure to comply with Section 2-1401. Defendant appealed.

Reversing the default judgment, the trial court first focused on the nature of DWPs and when and how to vacate them.  The guideposts:

– When a case is DWPd, a plaintiff has one year (or within the remaining limitations period) to file a new action under Code Section 13-217 (735 ILCS 5/13-217);

– A DWP order only becomes final and appealable when the one-year refiling period lapses.  Until that one-year time period expires, the DWP isn’t a final order and can’t be appealed;

– In addition, the one-year period doesn’t start running until after a court rules on a motion to vacate a DWP.  (For example: if a case is DWP’d on January 1, 2015, the plaintiff has through January 1, 2016 to refile the case.  If the DWP is vacated on June 1, 2015, the plaintiff has one year – through June 1, 2016 – to refile.);

– Code Section 2-1301 (735 ILCS 5/2-1301) allows a court to set aside any (non-final) default order at any time or to set aside a final judgment within 30 days of the judgment’s entry;

– After 30 days from the judgment date, the more stringent Section 2-1401 standards apply (735 ILCS 5/2-1401).  Section 2-1401 applies to judgments more than 30 days but less than 2 years old;

– A default order (an “order of default”) is simply a non-final order that prevents the defaulting party from making additional defenses but doesn’t determine any rights or remedies;

– A default judgment is the specific act that ends the litigation and finally decides the dispute;

– A default judgment has two elements: (1) a finding of the issues for the plaintiff; and (2) an assessment of damages.

(¶¶ 4-9)

Here, Since the one-year refiling period hadn’t expired when the plaintiff sought to vacate the DWP, the motion was timely.  As a result, Section 2-1401 didn’t apply and the plaintiff didn’t have to show due diligence or a meritorious defense.

The court also held that Section 2-1401 also didn’t apply to the defendant’s motion to vacate the default judgment in favor of the plaintiff. A default order entered in October 2007 but the default judgment didn’t enter until June 2008.  Since the defendant filed his motion to vacate the default judgment within 30 days of June 2008, the more relaxed standards of Section 2-1301 applied.  ¶ 9; also see (here)

Take-aways:

The case contains some good procedural reminders.  Specifically, an order of default differs qualitatively from a default judgment.  The latter assigns a dollar value to the plaintiff while a default order doesn’t award any monetary relief.

The case also stresses that a dismissal for want of prosecution isn’t a final (and therefore appealable) order until one-year elapses from (a) the date of the dismissal or (b) from the date a motion to vacate the DWP is denied.

Lastly, this case reaffirms the key differences between motions to vacate judgments before (Section 2-1301 motions) and after (Section 2-1401 motions) 30 days.

 

 

Mechanics’ Lien Doesn’t Secure Attorneys’ Fees and Costs – Utah Supreme Court

Q: Does a mechanics lien secure payment of attorneys’ fees and costs (in addition to the amount of improvements) incurred by a lien claimant under the Utah mechanic’s lien statute?

A: No.

In an earlier article (http://paulporvaznik.com/contractors-attorneys-under-illinois-mechanics-lien-law/502) I tried to harmonize some Illinois cases that discuss whether attorneys’ fees can be added to a mechanics lien amount.  It’s an important question since mechanics’ lien attorneys’ fees often end up astronomical; especially where there’s multiple litigants and the case drags on for several years.  

In Illinois, attorneys’ fees can only be assessed against a property “owner” but only after a finding that its failure to pay was “without just cause or right.” 770 ILCS 60/17.  Today’s post features a case from Utah, a place I’ve never practiced.  I deemed the case post-worthy because it highlights a lien issue likely to recur in mechanics’ lien cases.

2 Ton Plumbing, Inc. v. Thorgaard, 2015 WL 404592 (Utah 2015), involves the reversal of a contractor’s lien award of nearly $50K that included fees incurred over the course of a circuitous lien case involving multiple property owners and lenders.  In reversing the lien judgment, the Court expands on Utah’s lien statute (Utah Code Section 38-1a101-804 (the “Lien Act”)), as well as the philosophy underpinning mechanics lien law.

Under Utah’s Lien Act, a lien attaches to the value of services, labor, materials or equipment furnished or rented on an improvement or structure. It also allows a “successful party” to recover a “reasonable attorneys’ fee” which the court taxes as “costs” on the losing party. The Lien Act also allows the successful claimant to recover “costs” of preparing and recording the lien including reasonable attorneys’ fees incurred in preparing and recording the lien notice.

In gutting much of the lien amount, the Utah appeals court held that attorneys’ fees are normally only allowed by statute or contract.  If a lien claimant could always augment his lien amount with his attorneys’ fees, the amount claimed would be a “moving target” (the amount would keep going up indefinitely) and so frustrate the Lien Act’s purposes. ¶¶ 25, 35, 42.

The court also noted that since a party has no obligation to pay an opposite side’s attorneys’ fees in a lien case unless that party has lost the case, fees, by definition, can’t be included in a lien amount. Otherwise, it would be tantamount to putting the proverbial “cart before the horse” by allowing a lien claimant to tack on (future) fees before he was deemed a successful party. ¶¶ 38-42.

Afterword:

A decision worth noting for its universal applicability.  Since lien case fees are often substantial, it’s important to know what amounts can and can’t be included in a lien claim.  As 2 Ton shows, a failure to lien for the proper amount can have unfortunate fiscal ramifications.

 

 

Suit to Unmask Nasty Yelp! Reviewer Nixed by IL Court On First Amendment Grounds

With social media use apparently proliferating at breakneck speed, Brompton Building v. Yelp! Inc. (2013 IL App (1st) 120547-U)) is naturally post-worthy for its examination of whether hostile on-line reviews are actionable by the business recipients of the negative reviews.

A former tenant, “Diana Z.”, spewed some invective about an apartment management company where she questioned the management company’s business competence, integrity and people skills; especially as they related to billing and handling tenant rent payments.

The building owner (not the management company; by this time there was new management) sued Yelp!, the online review site, to unearth the reviewer’s identity through a Rule 224 petition for discovery so that it could later sue the reviewer for defamation and tortious interference with prospective economic advantage.  The court found the on-line review consisted of protected expressions of opinion and denied the petition for discovery. The plaintiff building owner appealed.

Result: Affirmed.

Rules/Reasoning:

Rule 224 allows a party to engage in discovery for the singular purpose of ascertaining the identity of one who may be responsible in damages.  The case law applying Rule 224 provides significant protection for anonymous individuals so that there private affairs aren’t intruded on.  The Rule’s mechanics: (1) the petition must be verified, (2) it must say why discovery is necessary, (3) it must be limited to determining the identity of someone who may be responsible in damages to the petitioner; and (4) there must be a court hearing to determine that the unidentified person is in fact possibly liable in damages to the petitioner.   ¶ 13.

The Rule 224 petition must set forth factual allegations sufficient to survive a Section 2-615 motion to dismiss (that is, does the proposed complaint state a cause of action?) in order to successfully seek pre-suit discovery.

In Illinois, defamation suits are defeated by the First Amendment to the US Constitution where the challenged statement isn’t factual (it’s an opinion, for instance) and the action is brought by (1) a public official, (2) a public figure, and (3) actions involving media defendants by private individuals.

There is no defamation for “loose, figurative language” that no person could reasonably believe states a fact. Whether something is sufficiently fact-based to underlie a defamation claim involves looking at (1) whether the statement has a readily understood and precise meaning, (2) whether the statement can be verified, and (3) whether its social or literary context signals that it is factual.  ¶ 20.

Illinois courts also espouse a policy of protecting site defendants like Yelp! from a potential torrent of lawsuits by recipients of negative postings.  In addition, the Federal Communications Decency Act (47 U.S.C. § 230) usually insulates a website like Yelp! from liability for publishing third party comments.

Here, the plaintiff failed to allege actionable defamation against Yelp!  While the court conceded that Diana Z.’s statement that the property manager was a liar and illegally charging tenants were factual on their face, when considered in context – the plaintiff couched her rant in hyperbolic speech – the statements were (protected) expressions of opinion. ¶¶ 29-30.

Since the plaintiff couldn’t make out an actual defamation claim against the anonymous Yelp! reviewer, its petition for discovery was properly denied.

Take-aways:

This is but one of many lawsuits involving vitriolic on-line criticism of businesses. In Illinois, the law is clear that to get a court to order a website operator to unveil an anonymous reviewer’s identity, the plaintiff must make a prima facie showing that the review is defamatory or had a tendency to cause third parties to dissociate from it and take their business elsewhere. Failing that, the court will deny a petition for discovery and the plaintiff will be left without a defendant or a remedy.

Defective Lis Pendens In Wisc. Suit Doesn’t Warrant Contempt Sanctions Against NY Lawyer – Seventh Circuit Says

imageThe Seventh Circuit recently considered the scope of civil contempt of court and the range of permissible sanctions for an out-of-state attorney who misfiles a document that potentially impedes the sale of real estate.

In Trade Well International v. United Central Bank, (http://caselaw.findlaw.com/us-7th-circuit/1691932.html) a New York attorney admitted temporarily in Wisconsin to pursue a Federal case there mistakenly filed a construction lien when he meant to file a lis pendens in a replevin suit seeking the return of furnishings his client provided to a Wisconsin hotel.  The lien clouded the hotel’s title and put a wrench in the defendant’s efforts to sell it to a third party.

As a sanction for the faulty filing, the district judge revoked the lawyer’s pro hac vice status (this allows a lawyer from state to practice temporarily in another), held him in contempt and fined him $500.  The lawyer appealed.

Held: Reversed. The sanction was too harsh.

Q: Why?

A: Under Wisconsin law, a lis pendens must be filed whenever legal relief is sought affecting real property that could confirm or change interests in that property.  The lis pendens must be filed in the register of deeds for the county where the real estate is located.  Fixtures are classified as real property by Wisconsin statute.

When a lis pendens is filed, a subsequent purchaser or lender on the property is bound by the proceedings in the same manner as a party to the lawsuit.

A lis pendens prepared by a member of the Wisconsin Bar doesn’t have to be authenticated. But where a non-member of the Wisconsin Bar prepares it, the lis pendens must be authenticated (sworn to under oath by a public officer of the State).

The purpose of the lis pendens is to give constructive notice to third parties that there is a pending judicial proceeding involving real estate.  A  lis pendens differs from a construction lien in that (unlike the construction lien) it doesn’t create a lien on real property.

Here, the attorney’s lis pendens was facially deficient since it referenced Wisc’s construction lien statute and it wasn’t properly authenticated.

The court then discussed the applicable contempt of court nomenclature.  A contempt sanction is civil if it is “remedial” but criminal if “punitive.” Where a litigant or lawyer is punished for out-of-court conduct, the contempt is “indirect.” For criminal contempt, the court must give notice to the party that it is being charged (with criminal contempt) and must ask the government to prosecute the contempt.

Before holding someone in civil contempt, the court must specify what “unequivocal” court order or command was violated by the person being sanctioned.  An order of contempt is immediately appealable.

Reversing the district court’s contempt finding, the Seventh Circuit held it was unclear whether the contempt finding was criminal or civil since the trial judge didn’t specify in the order.

The record also showed that the attorney was at most negligent: he mistakenly recorded a lis pendens that referenced (but shouldn’t have) Wisconsin’s construction lien statute. The Seventh Circuit stressed that negligence or hasty drafting isn’t enough to support a finding of bad faith under the law.

Since the district court couldn’t articulate the basis for its contempt finding against the NY attorney and because there was no evidence of intentional conduct by him, the contempt sanctions were improper and the contempt order was vacated.

Take-aways:

1/ Out-of-state counsel must familiarize himself with applicable law in the jurisdiction he’s temporarily admitted to practice in and should probably retain local counsel to assist who is more versed in the specifics of the forum/foreign jurisdiction;

2/ A contempt order must specify whether it’s civil or criminal and must explicitly reference the court order that was violated;

3/ Criminal contempt has a due process component: the sanctioned party must be given notice and an opportunity to be heard and the government must prosecute the formal civil contempt proceeding.

No Punitive Damages For Breach of Contract; Conversion of ‘Intangible’ Property = An Open Question – IL ND

Sometimes in breach of contract suits, I see clients (and attorneys, too!) let visceral considerations cloud their judgment.  They let emotions factor into a litigation equation that should purely be about “dollars and cents.”  What’s to an objective observer a simple monetary dispute, becomes a complex psychological event when a breach of contract plaintiff views the defendant’s breach as a personal affront – one calling out for revenge.  Usually though, a breaching defendant isn’t trying to make the plaintiff’s life miserable.  Instead, the defendant typically can’t meet his financial obligations under the agreement or he lets his performance lapse for purely strategic reasons. 

One way the law puts a check on emotions dominating a business dispute is by preventing plaintiffs from bootstrapping a breach of contract claim into a fraud claim.  Another way is through the firmly entrenched legal principle that punitive damages cannot be recovered for a breach of contract.

The latter rule is at play in David Mizer Enterprises, Inc. v. Nexstar Broadcasting, Inc., 2015 WL 469423 (N.D.Ill. 2015), where a business consultant sued a television broadcasting firm under various legal and equitable theories for wrongfully disclosing plaintiff’s proprietary software and business model to third parties in violation of a written licensing agreement.

The plaintiff alleged that after a three-year license period expired, defendant continued using plaintiff’s secret software and business model without permission.

The plaintiff sought over $330K in damages in its breach of contract suit and sought an award of punitive damages premised on the defendant’s bad faith.  The plaintiff also joined a conversion count based on the defendant’s unauthorized use of plaintiff’s software after the license lapsed.  Defendant moved to dismiss and to strike plaintiff’s punitive damages allegation.

Result: motion to dismiss denied; motion to strike punitive damages claim granted

Reasons:

Under Illinois law, punitive damages are generally not available for a breach of contract.  An exception to this rule applies where the contract breach amounts to an independent tort is done with “malice, wantonness or oppression.”  The court looks to a defendant’s motive for its breach in determining whether punitive damages are warranted.

The court struck the plaintiff’s punitive damages claim.  The plaintiff failed to allege malice or bad faith conduct by the defendant.  Instead, plaintiff’s allegations were consonant with a basic breach of contract action.  As a result, punitive damages weren’t warranted.

Next, the court sustained the plaintiff’s conversion claim. Under Illinois law, a conversion plaintiff must establish that he (1) has a right to certain property; (2) has an absolute and unconditional right to the immediate possession of the property; (3) made a demand for possession; and (4) the defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.

Typically, conversion must involve tangible, personal property like computer hardware or a car, for example.  Whether conversion applies to intangible property is an open question with cases going each way.

The defendant argued that plaintiff was suing to recover damages based on defendant’s interference with its intangible electronic data.  Rejecting this argument, the court found that since the licensing contract specifically mentioned plaintiff’s software and related writings, the lifted property was tangible enough to underpin a conversion claim.

The court held that the plaintiff’s allegation that the defendant deprived Plaintiff of the exclusive benefit of its software and information, stated a valid conversion claim sufficient to survive a motion to dismiss.

Take-aways:

Punitive damages aren’t recoverable in breach of contract suits.  The only exception is where the plaintiff can show the defendant’s breach was done with malice: for the sole purpose of harming the plaintiff;

Whether intangible property (like computer data) can underlie a conversion action is an open question.  The more “hard” or concrete property the plaintiff can point to, the better his chances of making out a civil conversion suit. 

 

Contractual Arbitration Clauses and Unconscionability – IL 4th Dist. Case Note

Courts generally favor contractual arbitration clauses. The reason is that they (in theory at least) save litigants’ time and money and also reduce court congestion.

Arbitration provisions appear in varied business settings ranging from franchise agreements and personal services contracts to employment agreements and most everything in between.

Willis v. Captain D’s , 2015 IL App (5th) 140234-U examines an arbitration clause in the employment contract context and whether the clause is expansive enough to cover an employee’s sexual harassment claim involving a co-worker.

There, a plaintiff grocery store cashier signed an employment contract that contained broad arbitration language.  Claiming her co-employee sexually harassed her and the defendant did nothing to stop it, the plaintiff filed multiple state court tort claims without first demanding arbitration. The trial court denied the employer defendant’s motion to compel arbitration finding the plaintiff’s assault and battery claims did not arise out of her employment and were beyond the scope of arbitration.  Defendant appealed.

Held: Reversed

In finding that plaintiff’s claims fell within scope of the arbitration clause, the court announced the key rules that govern arbitrability:

– Under the Illinois Uniform Arbitration Act, 710 ILCS 5/1 et seq., parties are bound to arbitrate the issues they agreed to arbitrate;

– A court (not an arbitrator) decides whether a particular dispute is subject to arbitration;

– The two main arbitrability issues are (1) whether the parties are bound by a given arbitration agreement, and (2) whether an arbitration provision applies to a particular type of controversy;

– Where two parties mutually agree to arbitrate, there is sufficient consideration to bind each side to the arbitration provision;

– Inclusion of the phrase “arising out of” or “related to” in connection with an arbitration agreement denotes broad application of the arbitration agreement;

– An arbitration clause will be deemed procedurally unconscionable where it’s difficult to find, read or understand and where a party didn’t have reasonable opportunity to appreciate the clause;

– Substantive unconscionability will negate an arbitration agreement where it’s terms are blatantly skewed in one side’s favor to the exclusion of the weaker contracting party or where arbitrating would impose substantial costs on a party;

– Continued employment after notice of an arbitration agreement is sufficient consideration to enforce the agreement.

(¶¶ 12-32)

Validating the arbitration clause, the court held that it was supported by consideration. It found the employer’s promise to employ the plaintiff and to keep employing her in exchange for plaintiff signing the employment contract was sufficient to bind the plaintiff to the arbitration agreement.

The court also rejected the plaintiff’s unconscionability arguments. On the procedural unconscionability front, the court found that the plaintiff had two separate occasions to review and accept the arbitration agreement (plaintiff was previously hired a few years ago by the same defendant) and the arbitration language conspicuously appeared in all-caps. It wasn’t buried in a maze of fine print.

Substantively, the court found that the plaintiff failed to support her claim that submitting to arbitration was cost-prohibitive – especially since the court filing fee exceeds the contractual arbitration fee.

The court also found that the arbitration agreement encompassed the plaintiff’s claims. While her assault and battery claims were against an individual employee, her remaining claims against the corporate defendant sounded in negligent hiring, retention and supervision. In light of the arbitration clause’s sweeping language, these claims clearly fell within the reach of the arbitration clause.

Take-aways:

– The court (not an arbitrator) determines whether a dispute is subject to arbitration;

– A promise of employment conditioned on employee signing arbitration agreement will likely meet requirements of a valid contract;

– Broad arbitration language that contains “arising out of” and “related to” phrasing will constitute strong support for a broad application of an arbitration clause.

Illinois LLC Manager Liability For LLC Contract Obligations – Some Basics

This unpublished case is dated (2011) but still post-worthy for its discussion of the nature of limited liability company (LLC) contract obligations and when someone is privileged to intentionally tamper with an existing contract.

In 6030 Sheridan Road, LLC v. Wright Management, LLC, 2011 IL App. (1st) 093282-U, the plaintiff real estate developer sued defendants – an LLC property owner and its principal – for tortious interference with business relationship after a planned condominium conversion tanked.

The plaintiff sued when the defendants terminated the condo conversion agreement because of their displeasure with the plaintiff’s handpicked real estate broker and marketing firm.

The plaintiff sued claiming the defendants tortiously interfered with plaintiff’s contracts with the broker and marketing firm and caused the plaintiff to breach those contracts.  The trial court granted summary judgment for the defendants.

Held: Affirmed.

Reasons: the court first held that an individual LLC member could conceivably interfere with a contract entered into by that LLC.  The elemental LLC rules relied on by the court:

– An LLC is a separate entity from its principal members and can sue and be sued and make contracts in its own capacity.

– An LLC is a hybrid form of doing business that combines the advantages of a corporation’s limitation on personal liability with a partnership’s pass-through tax treatment (i.e., the LLC pays no entity level state or federal income tax.)

– The Limited Liability Company Act (the Act) (805 ILCS 180/1-1 et seq.) requires an LLC to have one or more members and is a separate legal entity from its members.

– An LLC can be member-managed or manager-managed and LLC members owe an LLC’s other members a fiduciary duty of loyalty and care. The same holds true for managers of manager-managed companies.

– The debts of an LLC, whether arising in contract, tort, or otherwise, are solely the debt of the LLC; not its managers or members;

– A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.

– An LLC member can only be responsible for LLC debts where: (1) the articles of organization provide for individual liability; and (2) the member has consented in writing.

See 805 ILCS 180/10-10; 180/1-30; 180/15-1, 15-3.

Afterwords:

This case provides detailed discussion of the LLC business entity and the scope of an LLC member’s liability for contract obligations.

 

Fraud, Partnership Formation and Confidentiality Agreements in Illinois: A Case Illustration

The Northern District examines several recurring commercial litigation and employment law issues in nClosures Inc. v. Block and Company, Inc., 2013 WL 6498528. Chief among them are the facts giving rise to common law fraud liability, the fundamentals of a partnership relationship and the fiduciary duties that business partners owe one another.

Plaintiff designs and sells tablet computer accessories. In 2011, plaintiff and defendant entered a partnership agreement and a related Non–Disclosure Covenant (NDA) for the sale of the tablet items. The business relationship later imploded and plaintiff sued for damages.

Granting summary judgment for the defendant, the court examined the quantum of evidence needed to sustain fraud, breach of fiduciary duty and breach of partnership claims under Illinois law.

To establish common law fraud, a plaintiff must prove that: (1) defendant made a false statement; (2) of material fact; (3) which defendant knew or believed to be false; (4) with the intent to induce plaintiff to act; (5) the plaintiff justifiably relied on the statement; and (6) the plaintiff suffered damage from such reliance. But mere expressions of opinion or statements that relate to future or contingent events are not actionable.

Rejecting the plaintiff’s fraud claim, the court found that the plaintiff failed to establish reliance – that it took some action or refrained from action based on a false statement. The defendant’s alleged fraudulent statement – that a partnership existed – was made several months after plaintiff supplied tablet accessories. As a result, it was chronologically impossible for the plaintiff to have relied on the statement.

Next, the court found for the defendant on the plaintiff’s breach of fiduciary duty claim. To prevail on this claim, a plaintiff must show: (1) the existence of a fiduciary duty (basically, a relationship of business trust and loyalty); (2) a fiduciary duty was breached, and (3) that the breach damaged the plaintiff.

A partnership is a quintessential fiduciary relationship in Illinois. To establish a partnership under Illinois law, the plaintiff must show that two or more parties (1) joined together to carry on a trade or venture, (2) for their common benefit, (3) with each contributing property or services to the enterprise, and (4) sharing in the profits.

Here, the court rejected plaintiff’s fiduciary duty claim because there was no partnership between the parties as a matter of law. Since there was no joint sharing of profits and losses, there could be no partnership.

The plaintiff also lost its breach of contract claim based on the defendant’s alleged breach of the confidentiality agreement. In Illinois, a confidentiality agreement will be enforced only “when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.” How much effort is reasonable to keep information confidential is decided on case-by-case basis.

The record was devoid of any efforts the plaintiff made to safeguard its product design drawings. In fact, just the opposite was true: plaintiff freely provided copious design and product data to the defendant for sale to its ( defendant’s) customers. Since plaintiff didn’t expend any physical or fiscal resources to shield its data from disclosure, it couldn’t enforce the confidentiality agreement.

Afterwords:

A central partnership component is the sharing of profits. Without it, there can be no partnership or breach of fiduciary duty;

Fraud claims requires reliance on the false statement before the statement. If the false statement occurs after plaintiff takes action/non-action, the plaintiff will be unable to show he relied on the statement;

Valid nondisclosure agreement requires proof that the subject information is truly confidential and treated as such by the plaintiff.

‘Closely Intertwined’ Business Relationship Equals Possible Joint Venture – Says Illinois Court

Consider this: a multi-national plastics seller (“Seller”) has a written contract with a plastics manufacturer (the “Manufacturer”) that labels the Manufacturer as an independent contractor of the Seller.  Under the agreement, the Seller supplies material to the Manufacturer who then makes plastic products exclusively for the Seller and sells the products back to the Seller.  The Seller buys the finished products from the Manufacturer at a pre-set price and then sells them to its (Seller’s) own customers.  The Seller and Manufacturer do not share any profits on Seller’s product sales.

An employee of the Manufacturer then gets injured on the job and sues both the Seller and Manufacturer for damages claiming they are joint venturers and therefore equally responsible for his injuries.  This is a significant event given the size and financial resources of the Seller.

Question: does this claim possibly have legs?

Answer: “Maybe.”  The First District held that the question of whether there is a joint venture between Seller and Manufacturer was open enough to survive summary judgment.

The plaintiff in Hyatt v. Western Plastics, 2014 IL App (2d) 140178, suffered severe injuries when his arms got caught in an extruding machine. He sued his employer – the “Manufacturer” in the above snippet – along with the Seller on the theory that there was a joint venture between the Manufacturer and Seller.  The trial court entered summary judgment for the Seller.  The plaintiff appealed.

Reversing the trial court, the First District engaged in a detailed analysis of some Illinois business structure basics:

– A joint venture is an association of two or more persons to carry on a single enterprise for profit;

– Joint venture members  owe fiduciary duties to one another and are vicariously liable for negligent acts of the other joint venturers carried out in the course of the enterprise;

– No formal agreement is necessary to form a joint venture and it can be inferred from the parties’ conduct and surrounding circumstances;

– Joint venture is a creature of contract law; not a statute and depends on the parties’ intent;

– Cardinal joint venture traits include (1) a community of interest – manifested by the joint contribution of money, property, effort, skill or knowledge; (2) an express or implied agreement to carry on an enterprise; (3) a sharing of profits; and (4) joint control and management of the enterprise;

(¶¶ 72-77)

Synthesizing the case’s thick discovery record, the court found there was a disputed question of fact on whether the parties formed a joint venture.

Some of the evidence pieces that was key to the court’s summary judgment reversal included:

(1) The Manufacturer-Seller contract was nearly thirty years’ old (automatically renewing every year) and required the Manufacturer to make some 800,000 pounds of plastic products annually and to sell them exclusively to the Seller at a pre-set formula.;

(2) Exclusivity: the contract prevented the Manufacturer from selling the plastic product to anyone other than Seller and gave Seller the final say over any product or process changes;

(3) A “Cost Improvement” section of the contract provided that Seller and Manufacturer would share the benefits of cost improvements on a 50/50 basis;

(4) Multiple emails revealed that Seller’s and Manufacturer’s personnel discussed a mutually beneficial business relationship and alluded to long-term collaboration and cost savings sharing.

(¶¶ 80-101)

In the end, the Court really didn’t know what to make of the parties’ plastics making arrangement.  The most it could say was that it was  a “long-term, closely intertwined relationship.” (¶ 101).

Taken together, the evidence of the parties’ unique business model raised a material fact question (as to whether it was a joint venture) that should have survived summary judgment.

Afterwords:

Definitely a pro-plaintiff case in the sense that a company that’s arguably twice removed from an injured plaintiff and who sells to a universe of consumers unrelated to those the plaintiff’s employer sells to can still be deemed a joint venturer of that employer.

The case could have huge liability ramifications.  If a deep-pocketed seller can be viewed as being in a joint venture with a separate manufacturer, that seller is potentially on the hook for a high dollar jury verdict or settlement for actions of the manufacturer alone.

The case lesson for business defendants is clear: If the intent is to be considered separate and independent, they should document that and take pains not to jointly control business property or share in its profits.

 

Forum Selection Clause Dismissal Not ‘On the Merits’ – Plaintiff Can Refile in Another State

Ancient_Forum

A forum selection clause is a contract term that specifies where (as in what state) a lawsuit must be filed if there is a future dispute.

In Fabian v. BCG Holdings, 2014 IL App (1st) 141576, Plaintiff sued his ex-employer (a spin-off of the Cantor Fitzgerald security firm whose NYC office was decimated in the 9.11 terror attacks) for breach of contract and under the Illinois Wage Payment and Collection Act (IWPCA) claiming unpaid trading commissions and owed stock shares plaintiff under a written partnership agreement.

The partnership agreement contained a Delaware forum-selection provision that fixed exclusive jurisdiction over any partnership dispute in Delaware courts.

The trial court dismissed the IWPCA claim with prejudice and the other complaint counts without prejudice to a future filing in Delaware court.  The plaintiff voluntarily dismissed or “non-suited” the remaining claims.  Plaintiff appealed the “with prejudice” dismissal of his IWPCA claim.

Held: Reversed.

Reasons:

The plaintiff argued that the Delaware forum-selection clause was void because it was forced upon him. He claimed he was given less than 24 hours to sign the partnership agreement in an adhesive take-it-or-leave-it manner.

Under Illinois law, a forum selection clause is generally valid and should be enforced unless (1) the opposing party shows that it would violate a strong public policy of the state in which the case is filed or (2) enforcing the clause would be unreasonable in that it is so inconvenient that it basically deprives the party of its day in court.

Illinois public policy favors enforcement of forum-selection clauses.  Commercially versed parties should be able to freely define the parameters of their private agreement without court interference.  And the fact a court of another state would have to interpret and apply an Illinois statute isn’t enough to void a forum clause on public policy grounds.

When a case is dismissed on forum-selection grounds, it’s not a dismissal on the merits.  That’s because it only resolves the issue of where a plaintiff can litigate his claim.  It doesn’t decide any underlying facts or apply them to the substantive legal issues involved in a given case.

Where a plaintiff non-suits claims after his other claims are (involuntarily) dismissed, he has one year to refile the non-suited claims. See 735 ILCS 5/13-217.  If he does refile, it is treated as a new case; not a continuation of the old case.  This rule is important for appeal purposes: once the plaintiff non-suits his remaining claims, an order previously dismissing another claim becomes final and appealable.

(¶¶16-24).

The Court here agreed with the trial court that there was nothing repugnant to Illinois law in enforcing the Delaware forum provision.  But the court still reversed the trial court’s with prejudice dismissal of the plaintiff’s IWPCA claim.

Since the dismissal of that claim (the IWPCA count) was based on the Delaware forum-selection clause, there was no determination of the merits of the claim.  That is, the court never determined whether the plaintiff was in fact owed money or stocks from his ex-employer. The forum-selection provision only addressed the proper location for plaintiff to sue.  As a result, the trial court’s “with prejudice” dismissal of the plaintiff’s IWPCA claim was improper.  The plaintiff should be allowed to file his IWPCA count in Delaware.

Afterwords:

– A forum selection clause will be upheld unless it violates a recognized policy of the state where suit is filed;

– A dismissal with prejudice is normally improper where merits of case aren’t reached;

– Just because a state has to apply the law of a foreign state isn’t enough to void a forum selection provision.

 

The Attorneys’ Retaining Lien: Dealing With Client Property Amid Unpaid Fees

clip-art-tug-of-war-988934

When a lawyer-client relationship implodes, the lawyer is usually left with unpaid fees.  And since Rule 1.16 of the Illinois Rules of Professional Conduct requires a fired (or firing) lawyer to return all client papers and property, the lawyer owed fees often has no leverage to secure payments due him.

Enter the common law retaining lien.  This lien allows the lawyer to hold or “retain” his client’s papers until the client pays up. It’s a possessory or “passive lien”; meaning that the lawyer perfects the lien by keeping the client’s papers in his possession. He’s not required to file a lawsuit to foreclose the lien or to request a judge to adjudicate the lien.

Cronin & Company v. Richie Capital Management, LLC, 2014 IL App(1st) 131892-U filters the retaining lien question through the lens of a third-party electronic discovery company (the “Vendor”) holding client documents where both the attorney (who hired the Vendor) and the client are claiming superior rights to the documents.  The critical question is whether a law firm that gives client documents to the Vendor for litigation support and computer scanning relinquishes possession of the documents so that its retaining lien is lost. The answer: no.

The plaintiff law firm was hired by the defendant to assist in the collection of a $180M judgment it got against a Ponzi scheme organizer. As part of the plaintiff’s work on the case, they retained the Vendor to help with document storage and to create a website that the plaintiff and its client could equally access during the litigation. The relationship went bad and plaintiff law firm was fired by its client. Plaintiff and the client then both demanded that the Vendor return the documents. The plaintiff wanted the documents back so it could impress a lien on them while the client sought access to the site and documents so it could continue with the lawsuit.

The trial court granted injunctive relief for the plaintiff law firm and ordered the Vendor to return all documents to the plaintiff and the defendant Client appealed.

Ruling: Reversing the injunction, the First District sketched the elements of a lawyer’s retaining lien. (Note – the injunction was reversed for reasons unrelated to the retaining lien issue.)

Reasons:

A retaining lien gives the attorney the right to retain possession of the client’s documents and files that come into the attorney’s possession during the course of employment until the balance due the attorney is paid;

Possession of the client property that the lien is impressed against is essential to the existence and creation of the retaining lien;

The retaining lien requires an attorney’s continued possession of the client property for the lien to stick;

Once the attorney releases possession of the property, he loses the lien.

(¶¶ 21-22).

Here, the plaintiff law firm hired the Vendor to develop a Web hosting program to assist with the litigation. In doing so, the plaintiff supplied client documents to the Vendor so it could scan them into the the program. The defendant claimed that the plaintiff lost its retaining lien by giving defendant’s property to the Vendor.

The court disagreed. It held that while the Vendor was nominally (and ultimately) working for the defendant, it took its orders from the plaintiff.  Because of this, the Vendor’s possession of the client documents was imputed to the plaintiff.

The court equated the fact situation to one where an attorney deposits a check payable to the client with the clerk of court in order to resolve a fee dispute. In that scenario, the law is clear that tendering possession of the check does not equal releasing possession of the check for purposes of a retaining lien.

Afterwords: The case is post-worthy in view of the proliferation of third-party litigation support providers like electronic discovery companies. The salient holding of the case is that a retaining lien can apply to client property in the possession of a third party where the attorney hired or supervises that third party.

 

Mechanics’ Lien Claim Defeated Where Contractor Fails to Provide Proper Contractor Affidavit

Pyramid Development, LLC v. DuKane Precast, 2014 IL App (2d) 131131, vividly illustrates the importance of diligent record-keeping practices on construction projects and the dire financial consequences that can flow from a failure to do so.  It emphasizes how crucial it is for a contractor to comply with Section 5 of the mechanic’s lien act – 770 ILCS 60/5 (the “Act”) – the section that requires a contractor to give the owner a sworn statement that lists all persons providing labor and materials on a project.

The plaintiff contractor sued to foreclose a mechanics lien on several townhomes it was hired to build and also sued a subcontractor for defective concrete work supplied to the project.  After a bench trial, the court nullified the lien because it was negated by damage to the property.  Plaintiff appealed.

Result: Plaintiff’s lien is defeated because it didn’t comply with Section  5.

Reasons:

– The purpose of the Section 5 affidavit is to put the owner on notice of subcontractor claims;

– An owner has the right to rely and act upon a contractor’s section 5 affidavit unless the owner has reason to suspect the notice is false or knows that it’s false;

– An owner is protected from subcontractor claims where they’re not listed on the contractor’s affidavit unless the owner knows of the subcontractor omissions or has colluded with the contractor to exclude the subcontractors;

– Section 5 provides that it’s the owner’s duty to ask for and the contractor’s obligation to supply a sworn statement listing all parties furnishing lienable work on the property and the amounts owed to them;

– Where an owner doesn’t request a Section 5 affidavit, the contractor isn’t required to provide one;

– An owner’s previous acceptance of a flawed Section 5 affidavit doesn’t waive the contractor’s compliance with that section. (i.e., Just because an owner has accepted deficient affidavits in the past, doesn’t mean the contractor doesn’t have to comply with Section 5, e.g.)

(¶¶ 26-29).

Here, the property owner had a pattern of accepting faulty Section 5 affidavits. The plaintiff’s principal admitted that the names and amounts on the affidavits were often wrong and the amounts inflated.  Plaintiff also conceded that it routinely named itself as a subcontractor when it didn’t actually do any of the work on the townhomes.

The court held that since the plaintiff’s section 5 affidavits were facially erroneous, the lien claim was properly defeated.

The court also affirmed judgment against the plaintiff on its breach of contract claim. In a breach of contract suit involving construction services, a contractor is held to the “substantial performance” standard: he must perform in a workmanlike manner and a failure to do so is a breach of contract. (¶ 35).

A breach of contract plaintiff must also prove money damages.  And while he doesn’t have to do so with mathematical certainty, he still must offer some basis from which the court can compute the damage with reasonable probability. (¶ 37).

Here, the plaintiff didn’t meet his burden of proving damages.  Its record-keeping was scatter-shot and rife with discrepancies.  The plaintiff’s numbers didn’t match up and it couldn’t explain myriad invoice errors at trial.  This failure to carry its burden of proving damages doomed the plaintiff’s breach of contract claim.

Take-aways:

Accurate record-keeping is essential; especially on high dollar projects with multiple contractors;

Where an owner requests a section 5 affidavit, the contractor must supply one;

An Owner’s past acceptance of a faulty affidavit won’t excuse contractors duty to strictly adhere to section 5.

Illinois Joint Ventures – Features and Effects

Primo v. Pierini, 2012 IL App (1st) 103553-U discusses the key elements of a joint venture and how it differs from other common business arrangements.

The plaintiff contractor sued a construction manager to recover about $300k in building improvements it made in building a Chicago restaurant.  The construction manager was hired by the restaurant owner and was actively involved in funding the construction.

The construction manager in turn filed a third party suit against the restaurant owner for contribution.  It (the construction manager) claimed that it merely lent money to the restaurant owner and that there was no formal business relationship between them.

After a bench trial, the court found a joint venture existed between the construction manager and the restaurant owner based on their oral agreement to share restaurant profits among other reasons.

The court entered judgment for the plaintiff for nearly $300k and awarded defendant about $150K (one-half of the judgment) in its third-party claim  against the restaurant operator.  The court later reduced the judgment to about $140k after excising over $150k in extras and prejudgment interest from the judgment amount.  Each side appealed.

Result: Reduced judgment (minus extras and interest) affirmed.

Reasons:

The appeals court agreed with the trial court that there was a joint venture between the construction manager and restaurant owner.

– A joint venture is an association of two or more persons or entities to carry out a single, specific enterprise;

-Whether a joint venture exists is a factual inquiry and no formulaic rules ultimately determine whether a joint venture exists;

– Where the parties’ conduct evinces an intent to share profits from a common enterprise, the court will find a joint venture exists;

– The key joint venture elements are: (1) an express or implied agreement to carry on an enterprise; (2) a manifestation of intent by the parties to be associated as joint venturers; (3) joint interest as shown by the contribution of property, money or knowledge by each joint venturer; (4) joint control or ownership over the enterprise; and (5) the joint sharing of profits and losses;

– Like a partnership, each joint venture participant is an agent of the other one and is liable to third parties for another participant’s acts taken in the regular course of the venture’s business;

– Unlike an LLC or corporation, a joint venture is not a separate legal entity (i.e. like a corporation, LLC or limited partnership is): instead, a joint venture is a contractual relationship formed between the constituent venturers;

– Joint ventures can be made up of individuals, corporations, or a combination of the two.

(¶ 56-58).

The court rejected the defendant construction manager’s claim that it was only a lender (and not a partner or joint venturer) to the restaurant business.  The construction manager relied on section 202 of the Illinois Partnership Act (805 ILCS 206/202(a), (c)), which provides that receiving debt repayments from a business venture signals a lender-borrower relationship instead of a profit sharing/partnership one. (¶ 59-60)

Here, the court credited trial testimony that the parties planned to split profits well after the restaurant owner repaid the defendant’s loan.  In addition, the construction manager’s principal’s self-serving written statement that “I am not a partner” wasn’t sufficient to cast doubt on the trial testimony that defendants and the restaurant owner agreed to share profits indefinitely. (¶ 62)

In sum, the defendants’ active and direct involvement in funding the restaurant’s construction coupled with the agreement with the owner/operator to share in the profits manifested the intent to form a joint venture.

Afterwords

– A hallmark of a joint venture is the sharing of profits and losses in a common, one-time enterprise;

– Where one party lends money to another, this generally denotes a lender-borrower arrangement; not a joint venture or partnership one;

– Each enterprise participant’s active involvement in day-to-day functioning of a business, coupled with profit and loss sharing, is strong evidence of joint venture relationship.

 

 

 

 

 

 

 

Accord and Satisfaction: Quick And Dirty

Accord and satisfaction is a legal device utilized to satisfy a monetary obligation when there is genuine confusion as to how much is owed.  It can streamline litigation by eliminating the need for a trial on a contract action based on the parties’ conduct.  

An accord and satisfaction’s key elements are:

(1) a good faith dispute between the parties as to the amount owed;

(2) a not readily calculable (“unliquidated”) amount owed;

(3) consideration;

(4) a shared mutual intent to compromise the claim; and

(5) execution or performance of the agreement.

The “accord” is the agreement; the “satisfaction” is the agreement’s execution or performance.

Where a party tenders a check marked “payment in full”, the check recipient’s act of cashing the check can count as an acceptance (or satisfaction) of the accord. 

Accord and satisfaction only applies where there is an actual dispute between the parties and the monetary amount in question isn’t easily calculable.

Source: Boyer v. Built Properties, 2014 IL App (1st) 132780.

Attorney’s Intrusion on Seclusion and Cyberstalking Claims Against ‘Above the Law’ Blog Dismissed – IL ND

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In Huon v. Breaking Media, LLC, 2014 WL 6845866 (N.D.Ill. 2014), an Illinois attorney sued law blog Above the Law (ATL) and womens’-interest blog Jezebel.com, for reporting on the plaintiff’s arrest and subsequent trial on sexual assault and witness intimidation charges.

The plaintiff was criminally charged after he met a woman responding to a Craigslist ad where the plaintiff claimed he was a talent scout for a modeling agency.  (Now that doesn’t sound sketchy at all!!) (Cough.)

While the sex assault charge was pending, the plaintiff was separately accused of witness tampering.  The plaintiff was eventually acquitted of both charges after a three-day trial.

Plaintiff sued the two blogs after they published articles discussing the charges’ underlying allegations and the eventual trial result.

The plaintiff claimed the various blog articles and some hostile user/reader comments to the articles impugned his integrity causing him to lose clients. The plaintiff sued for various privacy tort and cyberbullying claims and the blog defendants moved to dismiss all counts. The Northern District dismissed most of the plaintiff’s claims.

Rules/Reasoning:

Intrusion on Seclusion

To state a claim for this tort, the plaintiff must allege (1) an unauthorized intrusion or prying into a plaintiff’s seclusion; (2) the intrusion is highly offensive or objectionable to a reasonable person; (3) the matters upon which the intrusion occurred were private; and (4) the intrusion caused anguish and suffering.

Prototypical examples of this tort include opening a person’s mail, searching someone’s wallet or safe and reviewing a person’s banking information. *14.

The court found that Plaintiff’s intrusion on seclusion claim based on user comments to the defendants’ article were protected by the Communications Decency Act, 47 U.S.C. 230(c)(1)(CDA), a statute that immunizes websites that simply republish information supplied by third parties.

Since the user comments – while offensive – couldn’t be attributed to the defendants under the CDA, the intrusion claim failed.  The court noted that in relation to the readers who posted comments on the blog articles, the defendants were simply “online information systems” that are not publishers under the CDA (see 47 U.S.C. 230(f).

Plaintiff’s argument that the blog defendants “incited” offensive user comments also failed. The court found that a website doesn’t incite unlawful comments simply by providing a forum for content. In addition, both defendants had detailed written policies that outlawed defamatory comments. Taken together, these facts defeated plaintiff’s “incitement” arguments. **4-5

The Court also dismissed the intrusion claim since the plaintiff at most alleged irresponsible (“shoddy”) journalism practices. He didn’t plead that either defendant pried into his personal affairs or violate any of his physical boundaries – an indispensable aspect of the intrusion tort. *14.

Intentional Infliction of Emotional Distress

This claim also failed.  An intentional infliction plaintiff must demonstrate (1) extreme and outrageous conduct that goes beyond all bounds of decency in a civilized community, (2) the defendant intended to inflict severe emotional distress on the plaintiff or know there was a high probability that the conduct would cause severe emotional distress; and (3) the conduct must in fact cause severe emotional distress.

Where intentional infliction is premised on published statements, if those statements don’t rise to the level of defamation, they necessarily can’t meet the even higher extreme and outrageous standard. *15

Here, the claims against the Jezebel blog defendants didn’t rise to the level of libel or extreme and outrageous conduct since the Jezebel posts were protected by the fair reporting privilege and because some of the content consisted of opinions, not facts.

But plaintiff did state a colorable intentional infliction claim against ATL for falsely reporting that plaintiff was charged with sexual assault twice (instead of once). 

ATL’s false statement that plaintiff had multiple sex assault arrests was defamatory per se – a false statement imputing the commission of a crime – plaintiff adequately alleged a cause of action for intentional infliction of emotional distress against ATL (as well as defamation).

Take-aways:

– Intrusion on Seclusion requires physical invasion of the plaintiff’s space or private domain;

– An online republisher isn’t responsible for provocative reader comments where it has written policies that outlaw offensive content;

– Inaccurate reporting doesn’t rise to the level of intrusion on seclusion or intentional infliction of emotional distress;

 

 

 

 

Recovering Court Costs In Illinois Litigation – What’s Covered?

a-very-upset-aol-salesperson-just-called-us (photo credit: www.businessinsider.com)

 Huang v. CNA, 2012 Ill. App. 1st 1112243-U provided a useful discussion of recoverable court costs in the context of a malicious prosecution suit.

To prove malicious prosecution, a plaintiff must show (1) the commencement or continuance of a criminal or civil proceeding; (2) the proceeding terminated in the plaintiff’s favor; (3) absence of probable cause; (4) malice; and (5) damages.

If the defendant had probable cause to sue or to file criminal charges, regardless of whether the suit or charges was successful, this will completely defeat a malicious prosecution claim.

“Probable cause” in the context of dropped criminal charges means a state of facts that would lead a person of ordinary caution and prudence to believe – or to have a strong suspicion – that the person committed a crime.

The key inquiry is on the state of mind of the one commencing the prosecution, not the actual facts of the case or whether the accused was guilty or innocence, that determines probable cause. As long as there is a an “honest belief” that the accused is probably guilty of an offense, the probable cause standard is met (and a malicious prosecution claim will fail). ¶ 40.

Here, the evidence reflected the defendant’s probable cause for charging the plaintiff with trespassing: He refused to leave the premises after his employer fired him.  The Illinois Criminal Code defines trespassing as a person remaining on the land of another, after receiving notice from the owner or occupant to depart. 720 ILCS 5/21-3(a)(3).

Based on the evidence that the plaintiff was belligerent and insistent (on staying), the court found the defendant had a reasonable basis to charge the fired employee plaintiff. ¶¶ 42-45.

The next issue grappled with by the court concerned what costs could the defendant employer recover after defeating plaintiff’s claims. Code Section 5-108 and 109 (735 ILCS 5/5-108, 5-109) work in tandem to govern recoverable costs in litigation.

Code Section 5-109 allows the winning party to recover costs. Case law interprets Section 5-108’s “court costs”  to encompass filing fees, subpoena fees and statutory witness fees. While court costs are recoverable, “litigation costs” (e.g. photocopying, research costs, etc.) generally are not.

Supreme Court Rule 208(d) also gives the trial court discretion to tax deposition costs where the deposition is “necessarily used at trial.” But where a case is disposed of before trial (like on a motion for summary judgment or dismissal), deposition costs aren’t properly taxed to the losing party. ¶¶ 49-50.

Here, the court affirmed the filing fees and subpoena fees but reversed the cost award for defendant’s depositions. Since there was no trial, the defendant’s deposition costs shouldn’t have been assessed against the plaintiff.

Take-aways:

– To establish probable cause in a malicious prosecution case, a defendant only needs to show an objective, honest belief that the plaintiff committed a crime;

– Deposition costs can be recovered by a winning litigant but only where the deposition is necessarily and actually used at trial;

– If a case is disposed of on a summary judgment or dismissal motion, the winner only can recover court filing fees, service/sheriff fees and subpoena costs.

 

Unconscionability: Substantive and Procedural – Illinois Case Snapshot

The Case: Rosenbach v. NorStates Bank, 2014 IL App (2d) 131162-U

Facts Summary: Plaintiff LLC member who guaranteed commercial real estate loan sues the lender after lender makes (allegedly) unauthorized loan advances, declares a default against the LLC and seizes over $200,000 of the plaintiff’s personal funds that were pledged to induce the loan to the LLC.  Plaintiff’s claims are for breach of contract and a declaratory judgment action seeking ruling that the commercial guaranty is unconscionable under Illinois law.

Procedural History: Lender moves to dismiss on dual bases that (1) plaintiff’s injury is derivative of injury to the LLC borrower; and (2) commercial guaranty is not procedurally or substantively unconscionable.  Trial court grants motion and plaintiff appeals.

Result: Trial court’s dismissal upheld.  Lender wins, plaintiff LLC member/guarantor loses.

Operative Rules:

To defeat a guaranty claim, a guarantor must establish he suffered a direct injury as a result of a lender’s breach; as opposed to injury that is derivative of the injury suffered by the borrower.  So, if a corporate borrower is damaged due to a lender’s breach, the borrowing entity has a right to sue; not a constituent (individual) member of that borrower (e.g. an officer, shareholder, employee, etc.);

Illinois’ declaratory judgment statute allows a court to make binding declarations of rights in cases where the parties’ dispute has crystallized and they have reached an impasse.  The “dec action” plaintiff must show (1) a tangible legal interest in the subject of the suit; (2) a defendant with an opposing interest to plaintiff’s; and (3) an actual controversy between the parties. 735 ILCS 5/2-701(a);

Illinois recognizes (a) procedural unconscionability; and (b) substantive unconscionability.  The former means there is unfairness during the contract formation stage that deprives one of the parties of freedom of choice.  The latter (substantive unconscionability) looks to the terms of a contract and whether they are so one-sided that they oppress or unfairly burden an innocent party and show an imbalance in obligations among the contracting parties.

Procedural unconscionability factors include whether each party had a chance to understand the terms of the contract, whether key terms were hidden amid “a maze of fine print” and any other circumstances surrounding contract formation.

¶¶ 20-28, 31-35

Application:

Plaintiff’s claimed injuries in the breach of guaranty count were purely derivative of the LLC borrower’s.  The extent of plaintiff’s liability to the lender defendant was tied directly to the borrowing entity’s liability to the lender defendant.  There were no facts pled that showed plaintiff would have any different (in nature or amount) liability to defendant than the underlying corporate borrower.

The court held that loss of a guarantor’s investment is a derivative injury, not a direct one.  As a result, plaintiff’s claims were defeated since he failed to plead a direct (as opposed to flow-through) injury as the result of any lender conduct.

The plaintiff’s unconscionability arguments also failed.  The plaintiff only made conclusory allegations that the guaranty was a pre-printed document, drafted by the lender who had a superior bargaining stance compared to the plaintiff.  These blanket allegations weren’t enough though to show a defect during the formation and execution of the guaranty.

The court also held that even if the guaranty was procedurally unconscionable, the plaintiff would still have to show sustantive unconscionability – that the guaranty terms were inordinately one-sided in favor of the lender (and against the plaintiff) that no court could fairly enforce the guaranty.

Here, the court allowed that the guaranty definitely did favor the lender and the lender was probably in a stronger contracting position than the plaintiff.  Still, the terms weren’t so one-sided that the court should abstain from enforcing them.  In rejecting the plaintiff’s substantive unconscionability argument, the court also cited the fact that the guaranty terms weren’t hidden or hard to understand or any unfair surprise.

Afterwords:

Individual guarantor of a corporate borrower must show separate and distinct injury from the corporate borrower to have standing to sue a lender for breach;

A sophisticated borrower will likely need to show both procedural (formation defects) and substantive unconscionability (unfair or one-sided contract terms) to free himself from a contract he willingly signed.

Contractor Can Recover for Extra Work Under Time & Materials Contract – IL

untitled (photo credit: www.anp.com; google images (12.19.14)

 

 

 

This article highlights the importance of using proper terminology and clearly defining payment obligations in written construction agreements.

In Schmoldt & Daniels Masonry v. 723 S. Neil, LLC, 2014 IL App (4th) 140102-U, the court discusses the difference between a time-and-materials contract and a lump sum contract and examines what a contractor must show to recover “extras” from a property owner.

A masonry contractor plaintiff and the owner defendant signed a contract that required the plaintiff to complete masonry work on a time and material (T&M) basis “not to exceed $80,000.” Plaintiff sued after the owner failed to pay about $75,000 in extras.

After a bench trial, the court granted a money judgment to the masonry contractor for the full amount of the extras and the owner appealed.

Held: judgment affirmed.

Reasons:

The court agreed with the plaintiff’s testimony that the $80,000 cap was only an estimate and contingent on the owner performing preliminary masonry work.

In a lump-sum contract, the contractor assumes the risk that the job will go over budget. In a T&M contract, the parties share the risk.  A T&M contract can be open-ended (no price limit) or capped (it can’t exceed a stated amount).  Under basic Illinois contract law, where contract terms are clear and unambiguous, they will be enforced as written.

A contract is ambiguous where its terms are reasonably susceptible to more than one meaning.  But just because parties disagree on the meaning of certain contract terms doesn’t make the contract ambiguous.

A contractor seeking to recover additional payment for extra work must establish

  • that the work was outside the scope of the contract;
  • the extra items were ordered by the owner;
  •  the owner agreed to pay for the extra work – either by words or conduct;
  • the extras were not furnished by the contractor voluntarily; and
  •  the extras weren’t rendered necessary due to any fault of the contractor.

(¶¶ 23-24, 31).

The Court agreed that the contract was ambiguous. The “not to exceed $80,000” language could plausibly refer both to the specific Scope of Work items as well as to additional items stated in the architectural plans and owner-requested items.

Based on the ambiguity, the Court allowed the parties to testify concerning their intent in negotiating and consummating the $80,000 price term.

The Court found the plaintiff’s testimony that the $80,000 wasn’t a firm price cap more credible than the owner’s opposing testimony.

Affirming the extras damages award, the court found the plaintiff established all elements for recoverable extras: that  plaintiff performed extra work at the owner’s request, the owner tacitly agreed to pay, and the extras weren’t performed gratuitously and due to any fault of the contractor. ¶¶ 32-34.

Take-aways:

Where a writing has two or more equally plausible meanings, a court will find it ambiguous and allow the parties to testify as to the writing’s intended meaning.

 The case also illustrates the importance of precision in drafting.  If the contractual intent is to cap costs no matter what, the parties should so.  

The case also states the simple five-part test for a contractor proving up its claim for extras.

Saying “I Wasn’t Served” Not Enough to Challenge Service Return On Corp. Registered Agent – IL Law

In Charles Austin, Ltd. v. A-1 Food Services, Inc., 2014 IL App (1st) 132384, the First District affirmed the denial of a corporate defendant’s Section 2-1401 motion to vacate a judgment.

About three months after judgment, the defendant sought to vacate the judgment claiming it was never served with the lawsuit.  The trial court denied the motion leaving the judgment intact.

Q: Why?

A:  

1/ A party can serve a private corporation by leaving the complaint and summons with the registered agent or any officer or agent of the corporation found anywhere in the State. 735 ILCS 5/2-204;

2/ An affidavit of service is prima facie proof of proper service and the court will indulge every presumption in favor of finding that service was proper;

3/ To attack service, the moving party must produce evidence that casts doubt on the return of service by clear and convincing evidence;

4/ A conclusory affidavit that merely says “I was never served” isn’t sufficient to refute a return of service.  ¶ 16.

Here, the defendant’s affidavit saying he didn’t recall receiving the plaintiff’s complaint wasn’t enough to contest service on the corporation.  A defendant’s bare assertion that it doesn’t remember receiving a summons and complaint is not the kind of evidence required to impeach a facially valid service return. ¶ 19.

In Illinois, to vacate a judgment more than 30 days old,  a petitioner must show (1) the existence of a meritorious defense, (2) due diligence in presenting the defense in the underlying claim, and due diligence in filing the 2-1401 petition.

The defendant failed to show a meritorious defense.  The plaintiff alleged the predecessor corporation secretly sold its assets to the defendant – the acquiring entity – while the litigation was pending and did so to elude the debt to the plaintiff.  A well-known exception to the general rule that a successor corporation doesn’t assume the debts of a corporate predecessor is where the seller engages in a fraudulent transaction to avoid the seller’s contract obligations.

Here, the court found that the fraud exception to the rule against successor liability applied.

The court found that plaintiff sufficiently pled under Illinois fact-pleading rules that the sale of the predecessor’s assets to the defendant was fraudulent and done for the purpose of evading the plaintiff’s contract rights.  As a result, the meritorious defense argument failed.  ¶¶ 28-37.

The defendant also failed to establish due diligence in raising its defenses to the underlying breach of contract suit.  The court noted the defendant’s registered agent was served with process in October 2012, the judgment entered in January 2013, the defendant’s bank account was liened in May 2013 and it didn’t file its 2-1401 motion until June 2013.

The eight month delay in responding to the lawsuit signaled its lack of diligence in defending the suit.

Take-aways:

– To challenge service, a defendant must do more than blanketly allege that he doesn’t recall receiving a pleading;

– If a plaintiff alleges factual basis for his claim, the defendant trying to vacate a default judgment will have difficulty meeting 2-1401’s meritorious defense element.

Prior Charging Order Trumps Later Divorce Court Order Involving Restaurant LLC Payouts

The Third District Appellate Court answers some important questions concerning the priority of competing creditors’ rights in the assets of a common debtor and the nature of appellate jurisdiction in FirstMerit Bank v. McEnery, 2014 IL App (3d) 130231-U.

There, a creditor obtained a $1.8M judgment against a defendant who had interests in several restaurant LLC ventures (the “LLCs”).  The creditor then moved for and received a charging order against all current and future distributions flowing from the LLCs until the judgment was satisfied.  The effect of the charging order was to place a lien or “hold” on the defendant’s distributions.  (See http://paulporvaznik.com/charging-orders-judgment-debtor-llc-member/5961).

A couple years later, defendant’s wife obtained an order in a divorce case that gave her a 50% interest in the LLCs.  About a year after that (divorce case) order, the trial court (presiding over the underlying suit) granted the plaintiff’s “turn over” motion (motion to require defendant to turn over future LLC distributions to the plaintiff/judgment-creditor.

The disputed issue: what took precedence?  The charging order against the LLCs or the later divorce court ruling giving defendant’s wife a 50% interest in the LLCs?  The trial court found that the prior charging order took priority over the defendant’s wife’s interest in the LLCs.  Defendant’s wife appealed.

Held: Affirmed.  Plaintiff’s charging order take priority over defendant’s wife’s interests in the LLCs

Reasons:

The Court first held that the trial court’s turn over order didn’t conflict with the divorce court order giving the wife a 50% share of the LLCs since that later order wasn’t “final” and appealable.

– Illinois Supreme Court Rule 301 provides that every final judgment is appealable as of right;

An order is final where it either terminates the litigation between the parties on the merits or disposes of the rights of the parties – either the entire controversy, or a separate branch of the litigation;

– A notice of appeal must be filed within 30 days after the entry of a final order or within 30 days after entry of the order disposing of the last pending post-judgment motion;

– Where multiple parties and claims are involved, a party seeking an appeal must request a Rule 304(a) finding (that there is no reason to delay enforcement of or appeal from an order) from the trial judge;

– An order entered in a citation proceeding under Code Section 2-1402 is final when the citation petitioner is in a position to collect against the judgment debtor or third party or the petitioner has been foreclosed from doing so

(¶¶ 30-33)

Here, the divorce court order granting the defendant’s wife a 50% share in the LLCs – while entered before the turn over order – wasn’t final because it didn’t terminate the divorce case.  There was no order of marital dissolution and the divorce case continued for further status.  As a result, the divorce court’s 50% share order was subordinate to the trial court’s charging order and later turn over order.

Take-away:

This case rewards aggressive creditor enforcement steps.  By charging (liening) the debtor’s LLC interests, the creditor was in a position to take “first dibs” on the LLC distributions to the debtor, even though a court order later gave the debtor’s spouse a 50% share in the LLCs. 

The case also cements the proposition that a charging order impresses a lien on a debtor’s LLC distributions and that this charging lien will take primacy over any later judgment or lien filing related to the same LLC distributions.

 

 

 

 

 

 

 

Land Trust Beneficial Interest is Personal Property; Related Realty Can’t Be Liened by Creditor (IL Law)

It’s easy to robotically parrot the “beneficial interest in a land trust is personal property” rule but First Clover Leaf Bank v. Bank of Edwarsville, 2014 WL 6612947 (5th Dist. 2014) actually examines the rule’s impact against the factual backdrop of a judgment creditor trying to lien a debtor’s residence.

The creditor plaintiff obtained a $400,000-plus judgment against a husband and wife (the “Shareholders”) on various commercial guaranties they signed.  A corporation that the Shareholders each held a 50% stake in was the beneficiary of a land trust that held title to the Shareholders’ home (the “Property”).

When plaintiff learned that the Shareholders were trying to sell the Property for over $700,000, it recorded a lis pendens based on its earlier breach of guaranty judgment.  The lis pendens filing dissuaded the Property’s contract purchaser from closing and a lender later sued to foreclose on the Property.

The plaintiff then filed suit against the land trust, the corporate beneficiary (the Shareholders’ company) and the Shareholders to impose a constructive trust over the foreclosure sale proceeds.  The trial court granted plaintiff’s summary judgment motion and imposed a constructive trust on the proceeds.  The court also held that the corporate beneficiary was the alter ego of the Shareholders and so plaintiff was entitled to a constructive trust on each Shareholder’s equitable interest in the foreclosure sale proceeds.  The land trust appealed.

Held: reversed.  Land trust beneficial interest is personal property; not real property.  As a result, the lis pendens recording didn’t affect the corporate beneficiary’s interest in the Property.

Rules/reasoning:

– A beneficiary’s interest in a land trust is personal property and is not considered real estate;

– To create a security interest in personal property, a creditor must look to Article 9 of the UCC;

– Assignment of a beneficial interest in an Illinois land trust transfers an interest in personal property and does not give the assignee a direct interest in the real estate subject to the trust;

– A lien on a beneficial interest is not a lien on the real estate itself;

– A corporation will be deemed an alter ego of a controlling shareholder where the corporation is inadequately capitalized, doesn’t issue stock or observe corporate formalities, fails to pay dividends, is insolvent, has no records and nonfunctioning officers;

– Illinois has a general reluctance to pierce the corporate veil and a party seeking to pierce must make a substantial showing on all these factors;

– A lis pendens notice can only be filed when real estate is involved (735 ILCS 5/2-1901); it is not proper to file in connection with a personal judgment against someone

(¶¶ 15-18)

Here, the Shareholders had no legal interest in the Property.  They were shareholders in a corporation that was a beneficiary of the land trust that held title to the Property.  The corporate beneficiary’s interest in the land trust was personal property.  Because of this, the Shareholders interest in that corporate beneficiary was also personal property.

The net effect: plaintiff could not impress a lien against the Property in efforts to enforce its guaranty judgments against the Shareholders. Instead, Plaintiff should have filed a UCC financing statement (in the Secretary of State’s office) to lien the beneficial interest in the land trust.  Since the shareholders had no definable legal interest in the Property (it was owned by the land trust), plaintiff couldn’t assert a constructive trust against the Property foreclosure sale proceeds.

Take-away:  A factually convoluted and tortured case that illustrates the challenges creditors face trying to untangle complex webs of corporate protection to reach a controlling individual’s assets.  If in the creditor’s position, in addition to filing a UCC statement, I think I would issue third-party citations on the land trust entity and the corporate beneficiary.  Then, I would try to impress a lien or seek a turnover order as to any of the Shareholders interests in either the land trust or the corporate beneficiary.

Motions to Continue Trial: Illinois Standards

 

imageIn K&K Iron Works v. Marc Realty, LLC, 2014 IL App(1st) 133688, a construction dispute involving a Chicago fitness center, the court discusses the factors a court considers when deciding whether to grant a trial continuance.  There, on the day of trial, after several years of litigation, the property manager defendant fired its attorney and sought a continuance (through its corporate agent).  The trial judge denied the continuance and entered a $150,000-plus judgment for the plaintiff subcontractor.

Affirming the trial court, the First District enunciated the key legislative, judicial and local court rules that together govern a court’s analysis when faced with a motion to continue trial:

– A litigant doesn’t have an absolute right to a continuance;

– The decision to grant or deny a motion for continuance is within sound discretion of the trial court and won’t be disturbed on appeal absent a “palpable injustice” or a “manifest abuse of discretion”;

– Section 2-1007 allows additional time for doing any act in the litigation process on “good cause shown”;

– Illinois Supreme Court Rule 231(f) provides that no continuance motion will be granted after the case has reached trial unless a sufficient excuse for the delay is shown;

– Once a case gets to trial, a continuance will only be allowed where the movant offers “especially grave reasons” for the continuance such as potential inconvenience to the witnesses, parties, and the court;

– Cook County Circuit Court Rule 5.2(b) provides that a continuance will not be granted on the basis of a substitution or addition of attorneys;

– There is no constitutional right to counsel in a civil trial between corporations;

– An important continuance factor is the degree of diligence (during the whole case) shown by a party that seeks the continuance;

(¶¶ 22-25); 735 ILCS 5/2-1007; SCR 231(f); Cook Co. Cir. Ct. R. 5.2(b)

Affirming the denial of the continuance, the Court noted that the property manager defendant had multiple chances to seek a continuance before the trial date.  By waiting until the day of trial, the defendant gambled (and lost) that the judge would give it additional time to secure alternate counsel.

The Court also rejected the defendant’s argument that under Supreme Court Rule 13 (the rule that governs withdrawal of counsel), it should have been given 21 days to find substitute counsel.  The Court noted that here, the defendant’s counsel didn’t withdraw.  Instead, the defendant chose to fire its attorney on the eve of trial.  As a result, Rule 13’s 21-day period to find substitute counsel didn’t apply.

Take-aways:

(1) A litigant’s right to a continuance of a trial has limits and the closer to the trial date, the harder it is to get a continuance;

(2) If a litigant moves for continuance on day of trial, he must show extreme necessity;

(3) waiting to fire an attorney on day of trial is a risky gambit;

(4) The 21-day period to get substitute counsel under Rule 13 doesn’t apply where a defendant fires a lawyer as opposed to that lawyer moving to withdraw.

 

The Third-Party Citation: How Long Does It Last?

Shipley v. Hoke, 2014 IL App (4th) 130810 provides an exhaustive discussion of Illinois’ post-judgment enforcement rules in the context of a judgment creditor trying to reach debtor assets held by third parties.

It’s key points concerning a citation’s life span include:

– Code Section 2-1402 allows a judgment creditor to prosecute supplementary proceedings for the purposes of examining a judgment debtor and to compel the application of non-exempt assets or income discovered toward the payment of a judgment;

– Section 2-1402(f)(1) contains a “restraining provision” that prohibits any person served with a citation from allowing a transfer of property belonging to a judgment debtor that may be applied to the outstanding judgment amount;

– If someone violates the restraining provision, the Court can punish the violator by holding him in contempt or entering a money judgment against him in the amount of the property he transferred; 

– A third-party citation must be served in the same manner a (“first party”) citation is served (e.g. either by personal service or certified mail);

– Supreme Court Rule 277(f) provides that a citation proceeding automatically terminates six months from the date of the respondent’s first personal appearance unless the court grants an extension of the citation;

– This six-month rule is an affirmative defense that must be raised by a citation respondent or else it’s waived;

-Rule 277(f)’s purpose is to prevent a creditor from harassing a judgment debtor or a third party subject to a citation proceeding and is designed to provide an incentive for creditor’s to diligently work to discover debtor assets;

– While a court can retain jurisdiction over a turnover order entered before but not complied with until after the expiration of the six-months, the court does not maintain jurisdiction to enforce any restraining provision violations past that six-month mark.

– Rule 277 does permit a creditor to request an extension of the six-month limitation period indefinitely to fit the needs of a given case.

(¶¶ 78-81, 92-93).

Take-away: While I often serve bank respondents with third-party citations by certified mail (since banks usually aren’t motivated to evade service),  a judgment creditor should serve any non-bank respondent by personal service; either via county sheriff or a special process server.

In addition, the creditor should keep track of when a judgment debtor first appears in response to a citation.  If it looks like the creditor’s post-judgment case isn’t going to be finished at the six-month mark, he should move to extend the citation for as long as necessary to complete his examination of the debtor and any third-party(ies).

 

LinkedIn Page Doesn’t Get Into Evidence As a Rule 803(17) “Directory” or “Compilation” in Podcast Dispute

imagesA key issue in Personal Audio, LLC v. CBS Corporation, 2014 WL 1202698 (E.D. Tex. 2014) was whether a LinkedIn page, printed off the ‘Net by a testifying witness, was admissible at a motion to transfer venue hearing as a “compilation” or “directory” under Federal Evidence Rule 803(17).

A broadcast behemoth defendant (CBS) tried to transfer a podcast patent infringement case from Texas to New York on the basis that material witnesses to the dispute lived closer to New York than Texas (where plaintiff was based).  The plaintiff wanted to keep the case in Texas.  In support of its motion to transfer, CBS tried to offer into evidence a LinkedIn page of a third-party witness who apparently lived in New York.  CBS wanted the page into evidence to support its argument that New York was the more convenient forum for the case.

Held: The LinkedIn page was inadmissible hearsay since CBS failed to lay a foundation for the page’s authenticity. CBS’s motion to transfer venue is denied.

Federal Rule of Evidence 803(17)

The basis for the court’s ruling was Evidence Rule 803(17).  This rule provides for potential admission of “market quotations, lists, directories, or other compilations” generally relied on by the public or persons in particular occupations.

The twin purposes for streamlined admissibility under this rule are reliability and necessity.  Necessity exists because most commercial publications have multiple authors so it’s not logistically feasible to have all of them testify to a document’s contents.  Reliability lies in the fact that the documents are regularly consulted by third parties and that if the documents weren’t accurate, the public or a given industry would stop consulting them. (*5).

To support its argument that key third-party witnesses lived closer to New York than Texas, CBS offered a third-party witness’s LinkedIn page through a CBS employee.  CBS labelled the LinkedIn page as “compilation” evidence under Rule 803(17).  Testifying about the page, the CBS employee stated he was a journalist and that he regularly used online resources to locate individuals – including the witness whose LinkedIn page was involved in this case.

Rejecting CBS’ argument, the court found that the LinkedIn page failed both prongs of the 803(17) admissibility test: “This is clearly not the type of evidence contemplated by FRE 803(17)”, it said.  The LinkedIn page wasn’t reliable because CBS offered no evidence to show LinkedIn (the “compiler” under the Rule) makes any effort to verify the accuracy of its member’s profile pages.  The court also found that the page wasn’t necessary since CBS could have provided testimony or an affidavit of someone who had actual knowledge of the witness’s/LinkedIn member’s location.

Because the page failed both the necessity and reliability prongs of the 803(17) test, the court discredited CBS’ evidence and found that CBS failed to carry its burden of showing it was more convenient to have the case litigated in New York instead of Texas. (*5).

Take-away:

A LinkedIn page or other social media member page can likely be authenticated and admitted into evidence but not as a Rule 803(17) compilation or directory (at least in this District).  If documentary evidence that supposedly shows a witness’s location isn’t reliable or necessary, the proponent of the evidence will need to do more than simply offer hearsay evidence through a third-party.  Instead, the proponent should try to get the evidence in through live testimony or an affidavit of someone who has first-hand knowledge of a witness’s whereabouts.

Post-script: In September 2014, the Federal jury awarded the plaintiff over $1.3M in damages against CBS for infringing the plaintiff’s podcast distribution patent.

 

Agreed Settlement Order Not a Final Order Under Res Judicata Test – IL 1st Dist.

The Illinois First District recently provided a good synopsis of res judicata in Mass Realty, LLC v. Five Mile Capital, 2014 IL App (1st) 133871-U, a November 2014 unpublished opinion.

The case involves two lawsuits – a 2010 mortgage foreclosure case (the “2010 Case”) and a 2013 breach of contract and unjust enrichment case (the “2013 Case”) that both involve a dispute over commercial property.

In the 2010 Case, a lender filed a foreclosure suit and the defendant real estate broker – the plaintiff in the 2013 Case – counterclaimed to foreclose a broker’s lien it recorded for  securing a tenant for the property. The broker’s lien was never adjudicated in the 2010 Case.  

In the 2013 Case, the broker filed suit against current and former owners to recover its commission.  The 2013 Case defendants moved to dismiss the case on the basis of res judicata. The trial court agreed and the broker appealed.

Held: Reversed.  The 2013 Case isn’t precluded by the 2010 Case.

Reasons:

The court found that the 2013 Case was sufficiently different from the 2010 Case so that the broker could go forward with the 2013 Case.

Res judicata elements

– Res judicata is designed to prevent multiple olawsuits between the same parties where facts and issues are the same;

– Res judicata bars a subsequent action between the parties involving the same cause of action;

– The three elements of res judicata are (1) a final judgment on the merits, (2) an identity of parties; and (3) identity of cause of action.

– Where these three elements are satisfied, res judicata bars not only every matter actually litigated but every matter that might have been litigated in the first action;

– A settlement agreement or other agreed order isn’t a final order for res judicata purposes;

– A judgment is final and “on the merits” where it determines the parties rights and liabilities based on the facts before the court

– Illinois uses the transactional test to determine whether causes of action are the same for res judicata purposes;

– Under the transactional test, separate claims are considered the same if they arise from a single group of operative facts; regardless of whether they assert different theories of relief.

(¶¶ 23-26)

The court ruled that a consent foreclosure in the 2010 Case wasn’t a final judgment on the merits.  The court likened a consent foreclosure to a settlement agreement – something that is not a final judgment. This is because a settlement agreement or agreed order is not a judicial determination of the parties rights, but is instead a recording or documenting of the parties’ agreement.

The court also found the “same cause of action” prong of res judicata absent.  In the 2013 Case, in contrast to the 2010 Case, the broker more definitively alleged a breach of the written commission contract and sought damages from the current and former property owner.

The broker’s 2010 Case counterclaim defensively pled the existence of his broker’s lien but didn’t name some of the defendants in the 2013 Case as those defendants didn’t yet have an interest in the property when the 2010 Case was pending.

Since the underlying facts, central allegations and some key defendants in the 2010 and 2013 Cases differed, the two cases were based on different operative facts and not the “same cause.”

Afterwords:

– When faced with a dismissal motion based on res judicata, respondent should underscore any differences between a prior and current lawsuit; including different parties, different underlying facts and distinct causes of action;

– By contrast, a party seeking dismissal based on the doctrine should focus on the sameness between two suits. It should highlight any common parties, property and factual allegations between the two cases.

 

 

 

Does A Garden-Variety Employee Owe Fiduciary Duties to His Employer in IL?

I’m going to answer with a (soft) “yes.”  Its a soft yes because the duty owed by a “regular”, non-officer employee is more limited than that owed by a corporate officer.  There also aren’t many published Illinois cases that discuss an employee’s duties to his erstwhile employer.

By contrast, cases are legion that detail the fiduciary duties owed by corporate officers to their corporate employers.  The case law is replete with multi-factored tests that describe what factors a court considers when determining whether a corporate officer breached fiduciary duties to his former corporate employer.

So what can and can’t a non-officer employee do once his employment ends? Here are some quick-hits that I extracted from several years’ worth of Illinois state and Federal cases:

(1) Employees who are not officers or directors are also bound by fiduciary obligations;

(2) An agent is a fiduciary with respect to matters within the scope of his agency and is required to act solely for the benefit of his principal in all matters concerned with the agency;

(3) A non-officer employee breaches fiduciary duties to the corporation where he diverts potential corporate clients to a competing business;

(4) In Illinois, former employees may compete with their former employer and solicit former customers as long as they do not do so before the termination of their employment;

(5) Employees may plan, form and outfit a competing corporation so long as they do not commence competition before their employment ends.

Sources:

LCOR, Inc. v. Murray, 1997 WL 136278 (N.D.Ill. 1997);

E.J. McKernan Co. v. Gregory, 252 Ill.App.3d 514, 530 (2d Dist.1993);

Veco Corp. v. Babcock, 243 Ill.App.3d 153, 160 (1993

The Corporate Opportunity Doctrine: An Illinois Primer

I typically encounter a corporate opportunity issue (a claim that a defendant usurped a corporate opportunity) in situations where a former employee goes to work for a competitor and the ex-employer claims the employee is exploiting a business opportunity he learned of solely through his association with the employer.

The employer will usually sue for injunctive relief and money damages under a breach of fiduciary duty theory premised on the assertion that the employee violated the corporate opportunity doctrine. The employee typically defends by arguing that he didn’t compete with his former employer and that any business he now does is purely the product of his own initiative and was developed outside the confines of his prior position.

Illinois state and Federal cases through the decades have sharpened the doctrine’s contours to these fine points:

– A corporate officer has the duty to act with “utmost good faith and loyalty” in managing the company;

– A corporate officer breaches his fiduciary duties where (i) he tries to enhance his personal interests at the expense of the corporate interests, or (ii) he hinders his corporate employer’s ability to carry on its business;

– Where a corporate officer solicits business for his own benefit or uses his employer’s facilities or resources to further his personal interests without informing the company, he breaches his fiduciary duties to that company; the core principle of the doctrine is that a fiduciary will not be permitted to usurp an opportunity developed through the use of corporate assets;

 – A plaintiff alleging a defendant usurped a corporate opportunity must show that the company benefitting from the officer’s actions are in the same line of business as the plaintiff/employer; but the companies don’t have to be direct competitors;

 – A corporate opportunity exists when a proposed activity is reasonably incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage;

– Where a corporate officer uses corporate assets to develop a business opportunity, he can’t then argue that his former employer lacked the ability to pursue that opportunity;

– Two key factors are: (1) whether the corporation had an actual or expected interest in the opportunity and (2) whether the acquisition of the questioned opportunity would impede the (ex-employer, e.g.) corporation’s ability to carry on its day-to-day business;

– Additional corporate opportunity factors include: (1) the manner in which the offer was communicated to the officer, (2) the good faith of the officer, (3) the use of corporate assets to acquire the opportunity, (4) the financial ability of the corporation to acquire the opportunity, (5) the degree of disclosure made to the corporation, (6) the action taken by the corporation in response to any disclosure, and (7) the need or interest of the corporation in the opportunity;

Case Examples Of Corporate Opportunity Breach

Corporate officers have been found in breach of their fiduciary duties when, while still employed by the company, they:

(i) failed to inform the company that employees are forming a rival company or engaging in other fiduciary breaches;

(ii) solicited the business of a customer before leaving the company;

(iii) used the company’s facilities or equipment to assist in developing their new business;

(iv) solicited fellow employees to join a rival business;

(v) used the company’s confidential business information for the new business; and

(vi) orchestrated a mass exodus of employees shortly after resigning from a company.

Afterwords: The above provides a good framework for handling a corporate opportunity breach. When representing a plaintiff in this type of case, I argue that the above factors weigh in favor of a finding of breach and will focus on any secret conduct of the defendant. The more clandestine, the better. 

Conversely, when defending a corporate opportunity suit, I stress that the opportunity was developed independently of my client’s former association with the plaintiff and that it (the opportunity) came to fruition by my client’s own efforts and not from the plaintiff’s resources.

Sources:

Drench, Inc. v. South Chapel Hill Gardens, Inc., 274 Ill.App.3d 534 (1st Dist. 1995);

Star Forge, Inc. v. Ward, 2014 IL App (2d) 130527-U;

Foodcomm Int’l v. Barry, 328 F.3d 300, 303 (7th Cir. 2003);

Lindenhurst Drugs, Inc. v. Becker, 154 Ill.App.3d 61, 68 (2d Dist. 1987)

Illinois Agency, Ratification and Alter-Ego Basics: Case Snapshot

image

Photo credit: passionateproject.blogspot.com

Several recurring commercial litigation issues are examined in Saletech, LLC v. East Balt, Inc., 2014 IL App (1st) 132639, a case that chronicles a dispute over a written distribution agreement for the sale of bakery products.

The plaintiff entered into the agreement with a Ukranian subsidiary  of various U.S. companies.  The plaintiff sued these U.S. defendants, claiming they were bound by the foreign subsidiary’s breach, that they were alter egos of the subsidiary, or at least ratified the subsidiaries’ conduct.  The trial court granted the U.S. companies’ motion to dismiss for failure to state a cause of action on all counts and the plaintiff appealed.

Held: Affirmed.

Rules/Reasons: Finding for the defendants, the court applied black-letter agency law, ratification and corporate liability rules.

Agency Law and Ratification

– agency is a fiduciary relationship where a principal has the right to control the agent’s conduct and the agent has the power to act on the principal’s behalf;

– an agent’s authority can be actual or apparent.   Actual authority can be (a) express or (b) implied and means that the principal has explicitly granted the agent authority to perform a certain act;

– apparent authority arises where (a) the principal holds the agent out as having authority to act on the principal’s behalf and (b) a reasonably prudent person would assume the agent has authority to act in light of the principal’s conduct;

– to show apparent agency, the plaintiff must prove (1) a principal’s consent or knowing acquiescence in the agent’s exercise of authority; (2) the third party’s good-faith belief that the agent possessed such authority; and (3) the third party’s detrimental reliance on the agent’s authority;

– apparent agency must be based on conduct of the principal; not the agent;

– ratification applies where a principal manifests an intent to be bound by an agent’s unauthorized act, after the fact;

– ratification can be shown mainly by a principal retaining the benefits of the unauthorized act.

¶¶ 14-15, 21

Here, the Court found the plaintiff failed to establish that the foreign subsidiary (who signed the contract) was the agent for the solvent U.S. defendants.  The plaintiff made only naked allegations of a principal-agent relationship between the domestic and foreign entities.

Without allegations that the defendants knew of the subsidiaries’ distributor agreement or that they held out the foreign firm as having actual or apparent authority to bind the defendants, the plaintiff’s agency allegations were too conclusory to survive a motion to dismiss under Illinois fact-pleading rules.

The plaintiff also failed to plead facts to show the defendants ratified any unauthorized conduct of the foreign company.  For example, plaintiff didn’t allege that the defendants accepted benefits from the distributorship contract after plaintiff alerted defendants to the foreign firm’s misconduct.

Alter-Ego

The plaintiff’s alter-ego allegations were also lacking. The plaintiff claimed that the signing foreign company was an alter-ego of the U.S. companies.

The alter ego doctrine affixes liability to a dominant person (or company) that uses a sham entity as a front or “conduit” in order to avoid contractual liability.  An alter ego plaintiff must make a “substantial showing” that one corporation is a dummy or “front” for another.

In breach of contract cases, the required showing for alter ego (piercing) liability is even more stringent than in tort cases.  This is because a party to a contract presumably entered into the contract with another company voluntarily and is presumed to suffer the consequences if the counterpart breaches and has no collectable assets. ¶ 25

The court found that here, the plaintiff failed to plead sufficient facts to demonstrate a unity of interest between the foreign company and the U.S.-based defendants that would permit the court to impute liability to the U.S. defendants.

Additionally, the plaintiff’s bare allegation that the defendants were “commingling funds” in order to defraud creditors lacked factual support and wasn’t enough to state a breach of contract claim predicated on an alter ego theory. ¶¶ 17-18, 22, 29.

Afterwords:

(1) Illinois fact-pleading rules require more than bare parroting elements of a cause of action to survive a motion to dismiss;

(2) Ratification only applies where plaintiff can plead facts showing a principal retained benefits of an improper agent transaction;

(3) Piercing the corporate veil based on alter ego allegations is difficult to prove; especially in breach of contract setting.

 

No Delay Damages Clause Not Valid Due to Owner’s Intentional Conduct – TX Supreme Court

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The key question facing the Texas Supreme Court in Zachry Construction v. Port of Houston, 2014 WL 4472616 (TX 2014) was whether a contract’s no-delay-damages (NDD) term can be relied on by a party who intentionally prevents the other side’s performance.  The answer: “no.”

The contract involved a $63M contract to construct a wharf big enough to hold two 1600 foot-long ships; each about the size of five football fields.  The time to complete the project was 2 years but the municipality insisted that part of the project be done within 9 months.

The contract’s NDD provision insulated the defendant municipality  from liability resulting from construction delays; even for missed deadlines caused by the defendant’s negligence, breach of contract or “other fault.”

To accommodate the defendant’s compressed time schedule, the plaintiff advised defendant that plaintiff would have to build a “cutoff wall”, which would allow the plaintiff  to work and still stay dry ( since water surrounded the project). After initially agreeing, the municipality changed course and refused to permit the needed cutoff wall.  As a result, the project ended up taking 4.5 years – some 2.5 years longer than provided for in the contract.

Plaintiff sued claiming about $30M in delay damages resulting from the defendant’s refusal to accommodate the plaintiff’s request to build the cutoff wall. A jury agreed and after a three-week trial, awarded nearly $19M in damages to the plaintiff. The appeals court reversed; it said the NDD clause immunized the defendant. It then awarded the defendant nearly $11M in attorneys’ fees incurred in litigating plaintiff’s case. The Texas Supreme Court reversed.

Reasons:

A contractor generally has the right to recover delay damages but contracting parties are free to modify or excise a delay damages provision by agreement.  Some recognized exceptions to the enforcement of NDD clauses include (1) where a delay isn’t intended or contemplated by the parties; (2) the NDD term results from fraud, misrepresentation or bad faith on the party seeking the term’s benefit; (3) the delay is so long that it’s tantamount to an abandonment of the contract; (4) where the delay results from active interference or intentional conduct of the owner; and (5) where the party seeking the benefit of the NDD term engages in “arbitrary and capricious” conduct.

Texas follows the near-universal damages rule that a party can’t insulate itself from liability its own intentional conduct.  This is an offshoot of the general contract law principle that provisions that protect a party from its deliberate, wrongful conduct are generally void as against public policy.  Otherwise, a contracting party could purposefully injure another with impunity.  This principle applies with equal force to vulnerable individuals and to large corporations (plaintiff is a large construction company).

Here, the Court found that the municipality unreasonably refused to accept the plaintiff’s request to construct the cutoff wall. The Court viewed the defendant’s stubbornness on this point as “arbitrary and capricious” and made it impossible for the plaintiff to timely complete the job. The net result was the court refused to enforce the NDD clause against the plaintiff and reinstated the $19M delay damages jury verdict.  The court also re-entered a $1.3M damage award for the plaintiff relating to certain funds held back by the defendant as liquidated damages. (The contract allowed the defendant to deduct $20K per day as liquidated damages for each day the project was delayed.)

Afterwords: Freedom of contract has limits. Even a large construction company like plaintiff is protected from arbitrary conduct that prevents its timely contractual performance. This case presents vivid illustration of a  court extending the tort law principle that a party can’t insulate itself from intentional conduct to the breach of contract setting. The case upholds the common sense rule that any contractual provision that allows a contracting party to intentionally prevent the other from performing incentivizes wrongful conduct and clearly violates public policy.

 

The IL Fiduciary Obligations Act: Added Protection Against Bank Liability

ATMProfessional Business Automation Technology, LLC v. Old Plank Trail Community Bank, 2014 IL App (3d) 130044-U presents a recent illustration of the Fiduciary Obligations Act, 760 ILCS 65/7 (the “Fiduciary Act”) – a statute that immunizes banks from liability to a corporate customer that gets fleeced by a high-ranking employees.

The only exceptions are where the bank (1) has actual knowledge of a fiduciary’s breach or (2)  exhibits bad faith in allowing a questionable transaction to take place.  An example would be where a business’s accountant endorses checks payable to the business to herself and the bank sees this and allows it to happen.

In Professional Business, a former member of the plaintiff LLC deposited about $45K over a five-month period in an account he set up under a fictitious but similarly worded (to the plaintiff) entity about 10 days after he resigned as member of the plaintiff LLC.  All funds deposited were intended for the plaintiff – the rightful payee.

When plaintiff found out about the ex-member’s scheme, it sued the bank for negligence and conversion on the theory that the bank shouldn’t have allowed the ex-member to open the sham account or to deposit monies in it.  The plaintiff also argued that the bank should have been more diligent in verifying the corporate status of the account holder before opening the account.  The trial court granted the bank’s summary judgment motion.

Affirming, the court held that the plaintiff failed to show bad faith by the bank or that it had actual knowledge that the former LLC member was breaching obligations owed to his principal.

Actual knowledge means “awareness at the moment of the transaction” that a fiduciary is defrauding the principal or using funds for private purposes in violation of a fiduciary relationship.  (¶  13).

Bad faith  means the bank was commercially unreasonable by remaining passive in a dubious situation and refusing to learn readily available facts surrounding the questionable transaction (like a corporate employee endorsing corporate checks to herself).

Here, the plaintiff failed to present any evidence that the bank had actual knowledge that the individual opening the dummy account was violating any fiduciary duties to a corporate principal.  The Court also found that the bank followed normal procedures when opening the account and there was nothing to alert the bank that the member was defrauding the plaintiff.

The bank offered sworn testimony (via affidavit) that it adhered to all internal protocols for opening a corporate account as it required the account opener to supply a corporate resolution and a FEIN number.

The bank officer also testified that she looked at the Secretary of State website and didn’t see anything suspicious – even though there was no mention of the account holder entity’s name as a valid corporation.

The Court also found that the bank defeated plaintiff under UCC Section 3-404 and 3-420.  The former section relieves a bank from liability where it pays out in good faith to an imposter or fictitious payee.  The latter statute (3-420) controls conversion of instruments and only allows actions by parties who actually receive an instrument (i.e., a check).  Here, since the plaintiff never actually received the deposited checks, the bank had no conversion liability under the UCC.  (¶ 15).

Take-away:

It’s difficult to sue and win against a bank.  Not only can the bank rely on the Fiduciary Act, but various sections of UCC Article 3 also provide safe harbors from liability to a bilked bank customer.  Business account holders should be vigilant and keep tabs on corporate employees who have broad money depositing and withdrawal authority.

As this case shows, the hurdles a plaintiff must clear to successfully hold a bank responsible for a corporate employee’s misdeeds make it all the more important for a company to have a system of checks and balances: no single employee should have free reign over a firm’s bank deposits and withdrawals.  The temptation to cheat is probably too great.

 

 

Information-Technology Firm Not An ‘Information’ Provider Under Negligent Misrepresentation Economic Loss Exception (ND IL)

computer crashPublications International Limited v. Mindtree Limited, 2014 WL 3687316 (N.D.Ill. 2014) looks at whether a Web site developer is financially responsible for  a customer’s multiple system crashes.

The plaintiff on-line consumer products reviewer sued the defendant information-technology firm after the plaintiff’s site kept malfunctioning.  The plaintiff sued for breach of the parties’ written consulting agreement and joined claims for wilfull and wanton conduct and fraudulent concealment. 

The plaintiff alleged that defendant’s negligence in installing and maintaining the site resulted in decreased customer traffic resulting in lost revenue.  The defendant moved to dismiss all claims except for the breach of contract count.  

Result: Motion granted. 

Reasons:

The Court rejected plaintiff’s breach of warranty claim failed because it was premised on a warranty – to comply with the standard of care of an experienced IT company – that didn’t exist in the parties’ contract. 

In Illinois, an express warranty is contractual in nature and the specific warranty text will govern the parties rights and duties.  Here, the consulting contract contained broad disclaimers of express and implied warranties as well as an integration clause. 

Illinois courts enforce warranty disclaimers as long as they’re conspicuous (e.g. bold, ALLCAPS language) and integration clauses are routinely applied to prevent contracting parties from trying to change a contract’s clear wording by citing prior oral statements related to the contract’s subject matter. (**2-3).

The Court struck the plaintiff’s negligence and willful and wanton counts based on the economic loss rule.   The economic-loss doctrine prevents a party from suing in tort to recover economic damages that are based on a breach of contract. 

So, if a contract involving a defective product exists, and the plaintiff alleges that the product defect caused disappointed commercial expectations, the plaintiff’s remedy lies in breach of contract; not in negligence or in another tort theory.

The Court found that the a contract clearly governed the parties’ relationship and the plaintiff’s claimed damages to its on-line presence, goodwill,  reputation and its brand were purely intangible and economic in nature. 

An exception to the economic loss rule involves an action alleging negligent misrepresentation.  This exception applies where a defendant is “in the business of supplying information for the guidance of others in their business transactions.”  Other economic loss exceptions include the fraud and sudden and dangerous occurrence exceptions.

Here, the negligent misrepresentation exception didn’t apply.  The defendant was hired to provide a product (software) and services (tech assistance) – not information (this in spite of the ironic “information-technology” title).  

Since the contract’s primary purpose was for the defendant to supply  software and technical services to the plaintiff, the negligent misrepresentation exception wasn’t triggered.  Any information provided by the defendant was purely tangential or “secondary” to the main purpose of the contract.

The Court also nixed the plaintiff’s “extra-contractual” duty argument: that defendant owed a duty of care outside the scope of the written contract.  The only situations that an extra-contractual duty applies are in professional malpractice suits (e.g., a legal malpractice case) where the defendant owes a fiduciary duty to a comparatively vulnerable plaintiff. 

The Court noted that there was no case-sanctioned practice or custom of allowing professional malpractice claims against IT developers and no law that saddled them with fiduciary duties to their customers.

 Afterwords:

– Warranty disclaimers are valid and enforced so long as they’re clear and conspicuous;

– The economic loss rule bars tort claims against a defendant who provides a mix of goods and information if the information is secondary to the supplier of goods or services.

 

Paper Lace In The House: Court Invalidates $5M Plus Contract to (Sort Of) Use Someone’s Last Name

hello-my-name-isI promise there will be no ‘What’s In a Name?’ (the Bard), “What’s My Name?” (Snoop Dogg) or “I’ve Got a Name” (the late great Jim Croce) references.  And while I’m on the subject – is there anything MORE 1970s AM-JAM or K-Tel then Jim Croce?  I don’t think so.  Well maybe that weird “Billy Don’t Be A Hero” song Ms. Sauer made us sing in third grade music class. (The video is even weirder!  the band members are clad in Civil War garb.  I S thee not!)  Maybe I’m projecting but there always seemed something vaguely dark and unnerving about that song.

No idea where I’m going with this. But consider: would you pay someone $5.5M at your death just because that someone promised to use your last name as a tack-on middle name for his sons?

The First District definitely would not in Dohrmann v. Swaney, 2014 IL App (1st) 131524 (1st Dist. 2014), where the Court entered summary judgment against a plaintiff who sued a former neighbor’s estate to recover about $5.5M in money and assets under a written contract.

In the 1980s, the plaintiff – then a 40-year-old surgeon with a wife and two kids – befriended his elderly neighbor – Mrs. Rogers – a widow who was in her early seventies.  In 2000, when Mrs. Rogers was 89 and the plaintiff was in his mid-fifties, Mrs. Rogers signed a contract drafted by the plaintiff’s estate planning attorney where Mrs. Rogers agreed to transfer at her death, her million-plus dollar apartment, its furnishings and a cool $4M in cash to the plaintiff all for – get this – the plaintiff’s promise to use the widow’s last name (Rogers) by adding it to plaintiff’s son’s middle names and for “past and future services.” That’s It. 

Mrs. Rogers’ stated reason for the transfer (according to plaintiff) was to perpetuate her family name which would provide her with psychological Comfort.

After Mrs. Rogers signed the contract, the plaintiff legally changed his sons middle names to include the Rogers reference.

Over the course of the next several years, Mrs. Rogers transferred the home into a trust and slid further into dementia and a guardian was eventually appointed to manage her affairs.

The plaintiff sued in the Circuit Court to enforce the agreement.  Mrs. Rogers’ (who died while lawsuit was pending) executor defended on the basis that the contractual consideration was grossly inadequate and shocked the conscience.  The trial court agreed and entered summary judgment for the estate.

Held: Affirmed

Reasoning:

The Court found that contractual consideration was lacking and the evidence showed a disparity in bargaining power and over-reaching by the plaintiff.

The black letter contract elements are (1) offer, (2) acceptance and (3) consideration.

Consideration consists of some right, interest or benefit flowing to one party and some corresponding forbearance, detriment or loss from the other.  Any act that benefits one side and disadvantages the other is generally considered sufficient consideration to form a binding contract.  But, where the consideration is so grossly inadequate as to “shock the conscience”, the contract fails.  (¶ 23).

A conscience-shocking failure of consideration is usually found in situations involving fraud and  blatantly one-sided (unconscionable) or oppressive contracts.  If there is a gross disparity in bargaining power or a blatant inequality of value exchanged, the Court will closely scrutinize the agreement and delve into the sufficiency of its consideration.  (¶ 23).  Where there is a complete failure of consideration, the Court can invalidate the entire transaction.  (¶ 24).

Here, the Court found that the contractual consideration was shockingly absent on its face.  For assets totaling $5.5M, all plaintiff had to do was file name change proceedings for his two adult (now) sons who promised to use the Rogers name as part of their name.  But in their depositions, the sons testified that their use of the Rogers name was sporadic at best: they only used it on certain applications and documents through the years.

The First District found that only staggered and unverified name use can hardly qualify for valid consideration: it was an illusory promise. (¶¶33-34).

The other plus-factor cited by the court was the glaring disparity in bargaining power between the parties.  Illinois courts will consider a contracting parties age, education and commercial experience when deciding whether to set aside a contract.

The plaintiff here was the stronger party in every way – physically, mentally and financially.  (¶¶ 37-39).  This obvious disparity  added support for the court’s finding of unfairness.

 

Commercial Frustration and the Impossibility Defense: The Case of the Missing Bentley

Illinois agency rules, consumer fraud law and the commercial frustration doctrine are the focal points of Tahir v. DMI, 2014 WL 985351 (N.D. Ill. 2014), a case involving the purchase of an undelivered Bentley.

The plaintiff sued multiple car dealer defendants for breach of contract and consumer fraud after he paid over $100,000 for a car he never received.  The companies and individuals involved in the sale of the car operated a complex web of interconnected business entities that made it difficult to properly identify the selling defendants. 

The defendants all moved for summary judgment.

Result: Judgment for plaintiff on breach of contract claim against the dealership; Judgment for management company on plaintiff’s consumer fraud count.  

Basis/Reasoning:

The Court found for the plaintiff on its breach of contract claim versus the dealership based on Illinois agency principles governing liability to third parties. 

The test for agency is whether the principal can control the manner and method of the agent’s work such that the agent can affect the principal’s legal relationship.  (*5). 

Where a principal’s identity is disclosed to a third party, the disclosed principal is liable to the third party for a breach of contract while the agent is not.

Where an agent enters into a contract for an undisclosed principal, the agent is personally liable on the contract. 

Where a plaintiff gets a money judgment against an agent and an undisclosed principal, the plaintiff must choose which party to take the judgment against. (*5-6).

Here, both undisclosed and disclosed principal rules applied.  The dealership was managed by another entity under a written management agreement.  That agreement was cryptic concerning each parties’ duties in relation to the other. 

Based on the agreement’s wording, it was equally plausible that the car dealer controlled the manager and vice versa.

Because of this uncertainty, the Court found the dealer was liable under the car purchase contract as either a disclosed principal of the manager or as an agent for an undisclosed principal – also the manager.  Either way, plaintiff stated a breach of contract claim against the dealer. (*5).

The Court rejected the dealer defendant’s impossibility and commercial frustration defenses that blamed another dealer for not delivering the car. 

The impossibility defense applies where the (1) the impossibility was not and could not have been anticipated by the contracting parties, (2) the party claiming impossibility didn’t contribute to it, and (3) exhausted all possible alternatives to permit performance. 

Commercial frustration applies where (1) the frustrating  event wasn’t foreseeable and (2) the value of performance has been practically destroyed by the frustrating event.  (*6).  

Rejecting the defenses, the Court found that the manager’s default under the management agreement was clearly foreseeable as the agreement specified respective default and remedy provisions. 

The dealership also failed to show it exhausted all attempts at performance, such as by buying the car itself. The dealership offered no evidence that it lacked the resources to buy and deliver the car to the plaintiff. (*6).

The Court ruled against plaintiff on its consumer fraud claim against the manager.  An Illinois consumer fraud plaintiff must show (1) a deceptive act or practice, (2) defendant’s intent that the plaintiff rely on the deception, and (3) occurrence of the deception in trade or commerce.  (*8). 

The Court found that the plaintiff failed to demonstrate a deceptive act by the manager such as its intent to take plaintiff’s money without delivering the car.  At most, the Court ruled, the plaintiff alleged a breach of contract claim; not consumer fraud.  (*8).

Take-aways:

Many businesses operate through a byzantine web of corporate parents, subsidiaries, holding companies, trade names and “d/b/a”s (doing business as).  The plaintiff wisely named all possible entity permutations as defendants and let them sort out the responsible parties through motion practice.

The case also shows how difficult it is to prevail on an impossibility or commercial frustration defense – especially where the parties are sophisticated commercial entities.

Medical Practice Break-Up Spawns Non-Compete Dispute

imageThe bitter breakup of a medical practice provides the setting for the Illinois Fifth District to consider the scope of a non-compete clause and how it impacts a minority shareholder’s buy-out rights.

Gingrich v. Midkiff, 2014 IL App (5th) 120332-U presents a dispute between two former partners in a medical corporation.  At the medical practice’s inception – in the late 1990s – the parties signed a stock purchase agreement that contained a 5-year/20-mile non-compete provision (the “Non-Compete”).

The Non-Compete only applied in two situations: (1) if a shareholder withdrew from the practice after giving the required written notice; or (2) where a shareholder was expelled from the practice.  The parties’ relationship quickly soured and in 2002, a decade-long cycle of litigation between the two doctors ensued.

The 2002 Lawsuit

A 2002 lawsuit between the parties culminated in the plaintiff buying defendant’s stock in the medical corporation.  The court in the 2002 case didn’t rule on whether the Non-Compete was enforceable.

The 2007 (and current) Lawsuit

In the 2007 case, plaintiff sued defendant alleging the defendant violated the Non-Compete by going to work for a rival practice within 20 miles of plaintiff’s office. 

The trial court dismissed.  It held that the Non-Compete didn’t apply because defendant didn’t withdraw and wasn’t expelled from the medical corporation.  Plaintiff appealed.

Ruling: Affirmed.

Reasoning:

The court rejected plaintiff’s law of the case (LOTC) argument.  The LOTC doctrine prevents relitigation of an issue of fact or law previously decided in the same case.  ¶ 14.  Its purpose is to avoid repetitive litigation of the same issues and to foster finality and consistency in litigation.  LOTC reflects the court’s preference to generally not reopen previously decided issues.

Here, there was no adjudication of the Non-Compete in the 2002 case.  The core issue litigated in that first suit was the valuation of defendant’s shares and whether plaintiff served a proper election to purchase those shares.

Since the cardinal issues in the 2002 and 2007 Lawsuits substantively differed, LOTC didn’t prevent defendant from challenging the Non-Compete in the 2007 case. ¶¶  17-19.

The court also found the Non-Compete wasn’t enforceable.  In Illinois, noncompetition clauses in the medical services context are heavily scrutinized and only validated where they have reasonable time and space limits.

¶¶ 22-24.

Finding the Non-Compete unambiguous, the Court held that the 5 year/20-mile strictures attached in only two circumstances: where a shareholder either (1) withdrew or (2) was expelled from the practice.  Here, defendant  didn’t withdraw and she wasn’t expelled.  As a result, the Non-Compete didn’t prevent the defendant from practicing within twenty miles of plaintiff’s office.  ¶¶ 25-29.

Afterwords: Clarity in contract drafting is critical.  The case illustrates that a Court won’t strain to find ambiguity where contract language is facially clear.  Gingrich also illustrates that a restrictive covenant will be construed in favor of permitting, instead of stifling, competition.  In hindsight, the plaintiff should have made it clear that if a shareholder departed the medical practice for any reason: whether voluntary, forced, or after a buy-out, the non-compete would still govern.

 

 

 

LLC Members Not Liable On Void Judgment Entered Against LLC

Downs v. Rosenthal, 2013 IL App (1st) 121406, features an in-depth analysis of the difference between corporate vs. individual liability, the nature of post-judgment proceedings, and appellate procedure.

Facts

Plaintiff sued defendant LLC and its individual members (the Members) for breach of fiduciary duty, breach of contract and a declaratory judgment that plaintiff was a 2.5% stakeholder in the LLC.  The trial court entered a money judgment against the LLC and Members jointly and severally.  The LLC defendant appealed the judgment but the Members did not.

The First District reversed and vacated the judgment, finding that plaintiff wasn’t an owner of the LLC and so wasn’t entitled to a share of the LLC’s profits.  But since the Members didn’t appeal the judgment, plaintiff instituted supplementary proceedings against them.  The trial court quashed the citations because the appeals court reversed the plaintiff’s judgment. Plaintiff appealed.

Held: trial court affirmed.  The voided judgment against the LLC is not enforceable against the Members.

Rules:

The LLC appealed – but the Members didn’t – the trial court’s ruling that plaintiff was entitled to 2.5% of the LLC’s profits over several years.  Usually, a nonappealing defendant can’t benefit from the efforts of an appealing defendant.   ¶ 20.

But the defendant that doesn’t appeal can benefit from a co-defendant’s successful appeal where there is an “interdependence of rights” among them that would make it unfair to allow a judgment to stand against the no appealing defendants. ¶¶ 20, 24.

The plaintiff’s right to the LLC profits was entirely dependent on his ownership interest in the LLC.  Since the appeals court found that plaintiff was not an owner of the LLC, plaintiff wasn’t entitled to any LLC profits.

In Illinois, an LLC is a separate entity from its constituent members and an LLC member or manager is not personally liable for a judgment against the LLC. 805 ILCS 180/10-10(a).  Once the judgment against the LLC was overturned, there was nothing to bind the Members: the Court found it was unfair to allow the plaintiff to enforce the vacated judgment against the Members.   ¶24.

The First District also rejected plaintiff’s res judicata (“a thing already judged”)argument – that the judgment which the Members didn’t appeal was final and so the Members were barred from challenging plaintiff’s attempt to collect on the judgment.

Res judicata, or claim preclusion, attempts to foster closure and finality in litigation.  The doctrine applies where there are successive causes of action and it bars a second action between parties after a previous final judgment on the merits.  It requires (1) a final judgment on the merits; (2) identity of causes of actions; and (3) identical parties in both actions. ¶ 25.

Here, the Court found that plaintiff’s enforcement proceedings were “supplementary” to the underlying judgment and were not, by definition, a second cause of action.  There was only a single action – plaintiff’s lawsuit.  As a result, the Court found that the Members could properly attack the plaintiff’s post-judgment efforts once the appeals court vacated the judgment against the LLC.  ¶ 26.

Take-aways: A defendant that doesn’t appeal a judgment can still benefit from a co-defendant’s successful appeal where there is an interdependence of rights between the two defendants.

However, Downs shows that it’s a perilous practice for one defendant not to appeal a money judgment when his co-defendant does appeal.  In Downs, while the LLC members ended up winning, they ran the risk of having to answer for a judgment that was entered against another party (LLC) and ultimately overturned.

Downs also illustrates that a judgment creditor’s collection proceedings aren’t viewed as separate claims for res judicata purposes.