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.