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.

 

 

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.

 

‘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.