Category: Business Torts

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.

 

‘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.

 

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.