Contractual Indemnity Clause May Apply to Direct Action in Bond Offering Snafu; No Joint-Work Copyright Protection for PPM – IL ND

The Plaintiff in UIRC-GSA Holdings, Inc. v. William Blair & Company, 2017 WL 3706625 (N.D.Ill. 2017), sued its investment banker for copyright infringement and professional negligence claiming the banker used the plaintiff’s protected intellectual property – private placement memoranda – to get business from other clients.  The parties previously executed an engagement agreement (“Agreement”) which required the banker to facilitate plaintiff’s purchase of real estate through bond issues.

The banker denied infringing plaintiff’s copyrights and counterclaimed for breach of contract, contractual indemnity and tortious interference with contract.  Plaintiff moved to dismiss all counterclaims.

In partially granting and denying the (12(b)(6)) motion to dismiss the counterclaims, the Northern District examined the pleading elements for joint-author copyright infringement and tortious interference claims and considered the reach of contractual indemnification provisions.

The counterclaiming banker first asserted that it was a joint owner of the private placement documents and sought an accounting of the plaintiff’s profits generated through use of the materials.  Rejecting this argument, the Court stated the Copyright’s definition of a ‘joint work’: “a work prepared by two or more authors with the intention that the authors’ work be merged into inseparable or interdependent parts of a unitary whole.” 17 U.S.C. 101.

To establish co-authorship, the copyright plaintiff must establish (1) an intent to create a joint work, and (2) independently copyrightable contributions to the material.  The intent prong simply means the two (or more) parties intended to work together to create a single product; not that they specifically agreed to be legal co-copyright holders.

To meet the independently copyrightable element (the test’s second prong), the Court noted that “ideas, refinements, and suggestions” are not copyrightable.  Instead, the contributed work must possess a modicum of creativity vital to a work’s end product and commercial viability.

Here, while the counter-plaintiff alleged an intent to create a joint work, it failed to allege any specific contributions to the subject private placement documents.  Without specifying any copyrightable contributions to the documents, the investment firm failed to satisfy the pleading standards for a joint ownership copyright claim.

The court next considered the banker’s indemnification claim – premised on indemnity (one party promises to compensate another for any loss) language in the Agreement. The provision broadly applied to all claims against the counter-plaintiff arising from or relating to the Agreement.  The plaintiff argued that by definition, the indemnity language didn’t apply to direct actions between the parties and only covered third-party claims (claims brought by someone other than plaintiff or defendant).

The Court rejected this argument and found the indemnity language ambiguous.  The discrepancy between the Agreement’s expansive indemnification language in one section and other Agreement sections that spoke to notice requirements and duties to defend made it equally plausible the indemnity clause covered both third-party and first-party/direct actions.  Because of this textual conflict, the Court held it was premature to dismiss the claim without discovery on the parties’ intent.

The court also sustained the banker’s tortious interference counterclaim against plaintiff’s motion to dismiss.  The counter-plaintiff alleged the plaintiff sued and threatened to continue suing one of the counter-plaintiff’s clients (and a competitor of the plaintiff’s) to stop the client from competing with the plaintiff in the bond market.  While the act of filing a lawsuit normally won’t support a tortious interference claim, where a defendant threatens litigation to dissuade someone from doing business with a plaintiff can state a tortious interference claim.

Take-aways:

Contractual indemnity provisions are construed like any other contract.  If the text is clear, it will be enforced as written.  In drafting indemnity clauses, the parties should take pains to clarify whether it applies only to third-party claims or if it also covers direct actions between the parties.  Otherwise, the parties risk having to pay the opposing litigant’s defense fees.

Filing a lawsuit alone, isn’t enough for a tortious interference claim.  However, the threat of litigation to dissuade someone from doing business with another can be sufficient business interference to support such a claim.

Joint ownership in copyrighted materials requires both an intent for joint authorship and copyrightable contributions from each author to merit legal protection.

 

Sole Proprietor’s Mechanics Lien OK Where Lien Recorded in His Own Name (Instead of Business Name) – IL Court

 

While the money damages involved in Gerlick v. Powroznik (2017 IL App (1st) 153424-U) is low, the unpublished case provides some useful bullet points governing construction disputes.  Chief among them include what constitutes substantial performance, the recovery of contractual “extras,” and the standards governing attorney fee awards under Illinois’s mechanics lien statute.

The plaintiff swimming pool installer sued the homeowner defendants when they failed to fully pay for the finished pool.  The homeowners claimed they were justified in short-paying the plaintiff due to drainage and other mechanical problems.

After a bench trial, the court entered judgment for the pool installer for just over $20K and denied his claim for attorneys’ fees under the Act.  Both parties appealed; the plaintiff appealed the denial of attorneys’ fees while the defendants appealed the underlying judgment.

Held: Affirmed

Reasons:

A breach of contract plaintiff in the construction setting must prove it performed in a reasonably workmanlike manner.  In finding the plaintiff sufficiently performed, the Court rejected the homeowners’ argument that plaintiff failed to install two drains.  The Court viewed drain installation as both ancillary to the main thrust of the contract and not feasible with the specific pool model (the King Shallow) furnished by the plaintiff.

The Court also affirmed the trial court’s mechanic’s lien judgment for the contractor.  In Illinois, a mechanics lien claimant must establish (1) a valid contract between the lien claimant and property owner (or an agent of the owner), (2) to furnish labor, services or materials, and (3) the claimant performed or had a valid excuse of non-performance.  (¶ 37)

A contractor doesn’t have to perform flawlessly to avail itself of the mechanics’ lien remedy: all that’s required is he perform the main parts of a contract in a workmanlike manner.  Where a contractor substantially performs, he can enforce his lien up to the amount of work performed with a reduction for the cost of any corrections to his work.

The owners first challenged the plaintiff’s mechanics’ lien as facially defective.  The lien listed plaintiff (his first and last name) as the claimant while the underlying contract identified only the plaintiff’s business name (“Installation Services & Coolestpools.com”) as the contracting party.  The Court viewed this discrepancy as trivial since a sole proprietorship or d/b/a has no legal identity separate from its operating individual.  As a consequence, plaintiff’s use of a fictitious business name was not enough to invalidate the mechanic’s lien.

The Court also affirmed the trial court’s denial of plaintiff’s claim for extra work in the amount of $4,200.  A contractor can recover “extras” to the contract where (1) the extra work performed or materials furnished were outside the scope of the contract, (2) the extras were furnished at owner’s request, (3) the owner, by words or conduct, agreed to compensate the contractor for the extra work, (4) the contractor did not perform the extra work voluntarily, and (5) the extra work was not necessary through the fault of the contractor.

The Court found there was no evidence that the owners asked the plaintiff to perform extra work – including cleaning the pool, inspecting equipment and fixing the pool cover.  As a result, the plaintiff did not meet his burden of proving his entitlement to extras recovery. (¶¶ 39-41).

Lastly, the Court affirmed the trial court’s denial of attorneys’ fees to the plaintiff.  A mechanics’ lien claimant must prove that an owner’s failure to pay is “without just cause or right;” a phrase meaning not “well-grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.” 770 ILCS 60/17(a).  Here, because there was evidence of a good faith dispute concerning the scope and quality of plaintiff’s pool installation, the Court upheld the trial court’s denial of plaintiff’s fee award attempt.

Afterwords:

1/ A contractor doesn’t have to perform perfectly in order to win a breach of contract or mechanics’ lien claim.  So long as he performs in a workmanlike manner and substantially completes the hired-for work, he can recover under both legal theories.

2/ A sole proprietor and his fictitious business entity are one and the same.  Because of this business owner – d/b/a identity, the sole proprietor can list himself as the contractor on a lien form even where the underlying contract lists only his business name.

 

 

Commercial Tenant Fails to Give Proper Notice of Intent to Extend Lease – IL Case Note

Although it’s an unpublished opinion, Sher-Jo, Inc. v. Town and Country Center, Inc., 2017 IL App (5th) 160095-U still serves as a cautionary tale for tenants that fail to hew to lease notice requirements.  The tenant plaintiff under the commercial lease was obligated to serve the defendant landlord with written notice by registered mail of the tenant’s exercise of its option to extend the lease for an additional five-year term.

Instead of mailing notice of its plans to extend the lease, the tenant faxed its notice and verbally told the landlord it was exercising its option to extend.  But the faxed notice didn’t specify the tenant was extending the lease.  It just said that the tenant’s sublessee – a restaurant – was going to extend its sublease for another five years.

The landlord rejected tenant’s attempt to renew the lease on the basis that it didn’t comport with the lease notice rules.  It (landlord) then entered into a lease directly with the restaurant subtenant.  The tenant filed suit for specific performance and a declaratory judgment that it properly and timely exercised the lease extension option.  After the trial court found the tenant successfully notified the landlord of its intention to extend the lease, the landlord appealed.

Held: Reversed.  Tenant’s failure to adhere to Lease notice requirement defeats its attempt to renew the lease.

Rules/Reasons:

A commercial lessee who seeks to exercise an option to extend a lease must strictly comply – not “substantially comply” – with the terms of the option.  And even though a failure to follow an option provision to the letter can have draconian results, rigid adherence to option requirements promotes commercial certainty.

Here, the tenant’s faxed notice only mentioned that it wished to extend the sublease with the restaurant.  The notice was silent about extending the master lease.

The Court rejected the tenant’s argument that a lease amendment modified the option notice provision in the main lease.  This was because while the amendment did reference the tenant’s option to extend the lease for an additional five-year term, it left untouched the master lease’s requirement that the tenant notify the landlord by certified mail of its intent to exercise the option.

Afterwords:

1/ In the commercial lease milieu, strict compliance with notice provisions is essential.  Although this case works a harsh result on the tenant/sub-lessor, the Court viewed fostering certainty in business transactions as more important than relieving a tenant who substantially, but not strictly, adhered to a lease notice requirement;

2/ Parties to a commercial lease should take pains to comply with notice provisions of a lease.  Otherwise, they run the risk of a court finding they failed to satisfy a precondition to extending a lease.