Bank Escapes Liability Where It Accepts Two-Party Check With Only One Indorsement – IL ND

BBCN Bank v. Sterling Fire Restoration, Ltd., 2016 WL 691784 zeroes in on some signature commercial litigation issues – namely, (i) the required showings to win a motion for judgment on the pleadings and summary judgment in Federal court, (ii) the scope of a general release, and (iii) the parameters of the UCC section governing joint payee or “two-party” checks.

The plaintiff – who was assigned a cause of action by a fire restoration company (the “Assignor”) that did repair work on a commercial structure – sued two bank defendants under the Uniform Commercial Code (UCC) for accepting a two party check (the “Check”) where only one payee indorsed it. The Assignor was a payee on the Check but never indorsed it before the banks accepted and paid out on it.

The banks moved for summary judgment on the plaintiff’s UCC claims on the basis that the Assignor previously released all of its claims to the Check proceeds in a prior lawsuit.  The Assignor in turn moved for judgment on the pleadings on the banks’ third-party action which sought indemnification from the Assignor for any damages assessed against the banks in the current lawsuit.

Result: Bank defendants’ motions for summary judgment granted; Assignor’s judgment on the pleadings motion (on the banks’ third-party indemnification claims) denied.

Rules/Reasons:

FRCP 12(c) governs motions for judgment on the pleadings.  A party can move for judgment on the pleadings after the complaint and answer have been filed.  When deciding a motion for judgment on the pleadings, the Court considers only the contents of the filed pleadings – including the complaint, answer, and complaint exhibits.  Like a summary judgment motion, a motion for judgment on the pleadings should be granted only if there are no genuine issues of material fact to be resolved at trial.

FRCP 56 governs summary judgment motions.  A party opposing a summary judgment must “pierce” (go beyond) the pleadings and point to evidence in the record (depositions, discovery responses, etc.) that creates a genuine factual dispute that must be decided after a trial on the merits.

UCC section 3-110 applies to checks with multiple payees.  It provides that if an instrument is jointly payable to 2 or more persons (not “alternatively”), it can only be negotiated, discharged or enforced by all of the payees.  810 ILCS 5/3-110(d).

Here, since both payees did not sign the Check, the banks plainly violated section 3-110 by accepting and paying it.  The Check was payable to two parties and only one signed it.

The banks still escaped liability though since the Assignor (the restoration company) previously released its claims to the Check proceeds against the bank.  In Illinois, a general release bars all claims a signing party (the releasor) has actual knowledge of or that he could have discovered upon reasonable inquiry.

Here, the Assignor’s prior release of the bank defendants bound the plaintiff since an assignee cannot acquire any greater rights to something than its assignor has.

Since the plaintiff’s claim against the banks were previously released by the Assignor, the plaintiff could not pursue its Check claims against the banks. As a consequence, summary judgment entered for the banks.

The Assignor’s motion for judgment on the pleadings against the banks third-party claims was denied due to the presence of factual disputes.  Since the court could not tell whether the Assignor misrepresented that it had assigned its claim to the Check by looking only at the banks’ third-party complaint and the Assignor’s answer, there were disputed facts that could only be decided after a trial.

Take-aways:

  • Motions for judgment on the pleadings and summary judgment motions will be denied if there is a genuine factual dispute for trial;
  • A summary judgment opponent (respondent) must produce evidence (not simply allegations in pleadings) to show that there are disputed facts that can only be decided on a full trial on the merits;
  • The right remedy for a UCC 3-110 violation is a conversion action under UCC section 3-420;
  • In sophisticated commercial transactions, a broadly-worded release will be enforced as written.

 

Supplemental Jurisdiction Quick-Hits : A Case Note

Southern OceanOcean Tomo v. Barney, (http://docs.justia.com/cases/federal/district-courts/illinois/ilndce/1:2012cv08450/275661/76) states the governing supplemental jurisdiction rules in a business battle over the rights to a patent valuation system.

The defendant, the developer of the system, was a member of the plaintiff financial services firm (an LLC) for several years when the relationship broke down over various issues.  Citing the company’s intolerable conditions, the defendant left with a company laptop.

The plaintiff filed a state court suit under various claims including the Computer Fraud and Abuse Act (CFAA) and the defendant removed the case to Federal court.  There, the defendant counterclaimed for breach of contract and other state law business tort claims in addition to his own CFAA claim against the plaintiff.

Plaintiff moved to dismiss the state law claims on the basis that the court lacked supplemental jurisdiction over them.

Ruling: Motion denied.  Defendant can proceed on his state law counterclaims.

Reasons:

Supplemental jurisdiction principles are codified at 28 U.S.C. 1367.  This section provides that in any case where a Federal court has original jurisdiction, the Federal court has “supplemental jurisdiction” over related state law claims.

Supplemental jurisdiction is proper where the state law claims are so related to the Federal ones that they form part of the same cause of action and stem from a common nucleus of operative fact.  Even a “loose factual connection” between the state and Federal claims will generally provide a predicate for supplemental jurisdiction.

A district court can decline supplemental jurisdiction where: (1) the claim raises a novel or complex issue of State law, (2) the state law claims substantially predominates over the Federal claims; (3) the Federal court has dismissed all claims over which it has original jurisdiction, or (4) exceptional circumstances or other compelling reasons exist for declining jurisdiction.  

The defendant’s Counterclaims alleged that plaintiff violated the LLC operating agreement by withholding profits from the plaintiff and a separate shareholder agreement.  The defendant also alleged a tortious interference with contract claim against the plaintiff.
Defendant’s lone Federal claim was the CFAA one – premised on the allegation that plaintiff was trying to reverse engineer defendant’s patent system, repackage it and sell it to third parties.
Denying the plaintiff’s motion to dismiss, the Northern District found that the defendants state law counterclaims were factually connected to the plaintiff’s Federal CFAA claim. The Court held that, at bottom, Plaintiff’s counterclaims were premised on allegations that Plaintiff engaged in a lengthy fraudulent scheme to steal defendant’s patent ratings system.
And while allowing that defendant’s state law counterclaims (breach of contract, tortious interference, misappropriation) involved a broader set of facts (than plaintiff’s CFAA count), they still derived from the same operative facts that were the foundation of the plaintiff’s claims.

The Court noted that defendant’s counterclaim allegations of plaintiff’s lengthy pattern of duplicitous conduct related directly to defendant’s claim that the plaintiff was trying to pilfer defendant’s patent ratings system.  This pattern of conduct was relevant both to plaintiff’s Federal computer fraud claims and to defendant’s state law counterclaim counts.

Since plaintiff’s motive (was it really trying to reverse engineer and steal the ratings system?) was key to the parties’ state and Federal claims , the Court found they were factually linked and supplemental jurisdiction was proper.

Afterword:

Ocean Tomo provides a succinct summary of supplemental jurisdiction rules.  As long as the state law claims are temporally related and at least loosely factually connected to the Federal claims, a Federal court can – but doesn’t have to – retain jurisdiction over state law claims that normally couldn’t be filed in Federal courts.

 

 

 

 

 

 

 

 

Joint Ventures, Close Corporations and Summary Judgment Motion Practice – IL Northern District Case Snapshot

The featured case is Apex Medical Research v. Arif (http://cases.justia.com/federal/district-courts/illinois/ilndce/1:2015cv02458/308072/52/0.pdf?ts=1447939471)

A medical clinical trials firm sued a doctor and his company for breach of contract and some tort claims when the firm learned the doctor was soliciting firm clients in violation of a noncompete signed by him.

In partially granting and denying a flurry of summary judgment motions, the Illinois Northern District highlights the importance of Local Rule 56 statements and responses in summary judgment practice. Substantively, the court provides detailed discussion of the key factors governing whether a business arrangement is a joint venture and what obligations flow from such a finding.

The clinical trials agreement contemplated that plaintiff would locate medical trial opportunities and then provide them to the doctor defendant.  The doctor would then conduct the trials in exchange for a percentage of the revenue generated by them.  The plaintiff sued when the parties’ relationship soured.

Procedurally, the court emphasized the key rules governing Local Rule 56 (“LR 56”) statements and responses in summary judgment practice:

LR 56 is designed to aid the trial court in determining whether a trial is necessary; Its purpose is to identify relevant admissible evidence supporting the material facts.  LR 56 is not a vehicle for factual or legal arguments;

– LR 56 requires the moving party to provide a statement of material facts as to which the moving party contends there is no genuine issue;

– The non-moving party must then file a response to each numbered paragraph of the movant’s statement of facts and if it disagrees with any statement of fact, the non-movant must make specific reference to the affidavits and case record that supports the denial;

– A failure to cite to the record in support of a factual denial may be disregarded by the court;

– The non-movant may also submit its own statement of additional facts that require denial of the summary judgment motion;

– Where a non-movant makes evasive denials or claims insufficient knowledge to answer a moving party’s factual statement, the court will deem the fact admitted.

(**2-3)

The court focused its substantive legal analysis on whether the individual defendant owed fiduciary duties to the plaintiff.  Under Illinois law, a joint venturer owes fiduciary duties of loyalty and good faith to his other joint venturer.  So too does a shareholder in a close corporation (a corporation where stock is held in the hands of only a few people or family members) – but only if that shareholder is able to influence corporate policy and management.

The hallmarks of an Illinois joint venture are: (1) an express or implied association of two or more persons to carry out a single enterprise for profit; (2) a manifested intent by the parties to be joint venturers; (3) a community of interest (i.e. joint contribution of property, money, effort, skill or knowledge); and (4) a measure of joint control and management of the enterprise.  (*16).

The most important joint venture element is the joint control (item (4)) aspect.  Here, there were provisions of the parties’ written contract that reflected equal control and management of the clinical trials arrangement but other contract terms reflected the opposite – that the plaintiff could supervise the doctor defendant.  These conflicts in the evidence showed there was a genuine factual dispute on whether the parties jointly controlled and managed the trial venture.

The evidence was also murky as to whether the doctor defendant had enough control over the corporate plaintiff to subject the doctor to fiduciary obligations as a close corporation shareholder.  The conflicting evidence led the court to deny summary judgment on the plaintiffs’ breach of fiduciary duty claim. (**16-17).

Afterwords:

Procedurally, the case presents a thorough summary of the key rules governing summary judgment practice in Illinois Federal courts.  The party opposing summary judgment must explicitly cite to the case record for its denial of a given stated fact to be recognized by the court.

The case also provides useful substantive law discussion of the key factors governing the existence of a joint venture and whether a close corporation’s shareholder owes fiduciary duties to the other stockholders of that corporation.