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.