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).

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.