Category: Real estate litigation

Failure to Challenge Damages Expert Via Post-trial Motion Dooms Lawyer’s Attack on Legal Malpractice Jury Verdict

Midwest Mailing & Shipping Systems, Inc. v. Schoenberg, Finkel, Newman & Rosenberg, 2023 IL App (1st) 220562-U illustrates in sharp relief the consequences flowing from a failure to file a post-trial motion in a jury case and the latitude afforded a jury when it fashions a money damages award/

Plaintiff, a Wisconsin corporation licensed to do business in Illinois was the exclusive dealer for Neopost, a Wisconsin company that made and sold postage meters.

The plaintiff-Neopost agreement allowed the latter to terminate the exclusive arrangement if plaintiff assigned its dealership rights or abandoned its business.

After a dispute arose between plaintiff and Neopost, defendants advised plaintiff to terminate its Wisconsin incorporation, incorporate a new Illinois business, and assign the Wisconsin company’s business to the new Illinois entity. As a result, plaintiff alleged Neopost terminated the dealership agreement and financially gutted plaintiff’s business.

Plaintiff and Neopost then filed separate lawsuits in Illinois state court and New York Federal, respectively. The parties eventually settled and dismissed their competing lawsuits with Plaintiff receiving a payment of $300,000 to give up its “territorial exclusivity right” to sell and service Neopost’s postage meters.

Plaintiff then sued defendant law firm and two of its attorneys, Gambino and Goldberg for legal malpractice. Plaintiff’s damages expert opined that but for defendant’s legal malpractice, Neopost would have paid Plaintiff $2.73 million – some $2.4 million north of the settlement amount – for Plaintiff to give up its exclusive right to sell Neopost products.

After a jury trial, the jury sided with the law firm and attorney Gambino but entered a judgment against attorney Goldberg for $700,000.

On appeal, Goldberg argued that the Court improperly considered speculative damages testimony from Plaintiff’s expert. The Court found that Goldberg forfeited this argument on appeal. It cited Code Section 2-1202 states that if a party in a jury case fails to file a posttrial motion seeking a new trial, it waives the right to apply for a new trial. 735 ILCS 5/2-1202(e)(2020). (By contrast, Code Section 2-1203, governing bench trials, provides that a party may (but doesn’t have to) file a posttrial motion within 30 days after judgment.)

Since Goldberg did not file a posttrial motion challenging the jury verdict, he forfeited his arguments against the damages expert.

The Court rejected Goldberg’s argument that he preserved for appeal the issue of plaintiff’s damages expert’s testimony by raising a challenge to the testimony in an earlier summary judgment motion. This is because when a summary judgment motion is denied and a case proceeds to trial, the denial of summary judgment is not appealable since any error in denying summary judgment merges into the judgment entered at trial. [¶ 20]

The Court then rejected Goldberg’s argument that the jury verdict was too imprecise. The Court cited well-settled Illinois law that a jury verdict amount is generally at the jury’s discretion and is only required to be based on a fair degree of probability and is not subject to “precise determination.” [¶ 25]

Here, the plaintiff’s expert opined that but-for Goldberg’s legal malpractice, plaintiff lost out on an approximate $2.4 million payout to release its territorial exclusivity right. The jury, by only allowing a fraction of the claimed damages, clearly did not fully credit the expert’s testimony.

Lastly, the Court found that the evidence introduced at trial supported the jury’s $700,000 verdict. It credited the testimony that the sale of Neopost’s postal machine products accounted for the majority of plaintiff’s business, that plaintiff planned to ask for a $5 million payment in exchange for release of territorial exclusivity rights several years before trial, and that a Neopost witness testified that it likely would have paid $600,000 for plaintiff to cede its exclusivity rights. In the aggregate, according to the Court, the plaintiff introduced sufficient evidence to support the jury’s verdict.

Case Lessons:

A failure to raise an issue in a post-trial motion can result in forfeiture of the issue on appeal;

A jury is given wide berth in terms of damages it can award. A damages verdict does not require mathematical precision; all that’s required is there be a reasonable basis for the verdict; and

Jury damage award will not easily be overturned. All that is required is that the money verdict establish, with a fair degree of probability, a basis for computation of damages.

 

Business Broker Wins Contract Suit Against Accountant: Special Concurrence Chides Overuse of Adverbs in Briefs

APS v. Sorkin, 2023 IL App (1st) 211668-U considers some important issues that recur in breach of contract litigation and features an appellate judge urging lawyers to excise superfluous adverbs from their legal briefs.

The business broker plaintiff sued an accountant for damages after he sold his practice to a buyer introduced by the plaintiff during the term of a written agreement between the parties.

The plaintiff sought 10% of the sale fee plus attorneys’ fees. The trial court granted summary judgment for the plaintiff and the defendant appealed.

Affirming the judgment, the First District first noted that a party seeking to enforce a contract must prove it substantially complied with the material terms of an agreement. Conversely, a party who materially breaches a contract cannot recover damages from the non-breaching party.

The defendant argued that plaintiff breached the contract by refusing to request updated letters of intent (LOIs) from prospective buyers of the practice and by unilaterally terminating the contract.

The court rejected both arguments. It first noted that the subject contract gave plaintiff the exclusive right to market defendant’s accounting practice for a 90-day period with 15-day automatic renewal terms.

The contract did not require plaintiff to employ specific marketing techniques such as soliciting additional LOIs from prospects. It only obligated the plaintiff to facilitate the sale of the accounting business by marketing it and locating potential buyers. As a result, the Court found that plaintiff did not breach the agreement by refusing defendant’s request to obtain new LOIs from prospects. [¶ 25]

The Court also rejected the defendant’s claim that plaintiff breached by terminating the contract. Defendant cited language in the contract that apparently provided him with sole right to terminate. The Court noted that perpetual contracts or ones of indefinite duration are disfavored and terminable at the will of either party. Since the Court found that the contract did not give defendant an exclusive termination right, it held that the plaintiff did not breach by unilaterally ending the contract once the initial 90-day term expired. [¶ 27]

Defendant also claimed the contract was unenforceable under Section 10-30 of the Business Broker Act, 815 ILCS 307/10-30(a)(the “BBA”). The BBA, among other things, requires a business broker (like plaintiff) to provide a written disclosure document to a client at the time or before a client signs a contract for services.

Plaintiff’s agent signed an affidavit stating that he supplied defendant with the required disclosure document more than three months before the contract was signed. Since defendant did not oppose this affidavit, plaintiff’s testimony was taken as true by the Court when ruling on plaintiff’s summary judgment motion.

Next, the Court affirmed the trial court’s denial of the defendant’s motion for leave to amend his affirmative defenses.

Defendant sought to file amended affirmative defenses of Plaintiff’s material breach and failure to comply with the BBA. However, since the record evidence demonstrated that Plaintiff did not materially breach the contract by terminating it and Defendant did not challenge Plaintiff’s affidavit testimony that it provided the required BBA disclosure document, Defendant’s proposed defenses would not cure any pleading defects. [¶ 37]

Judge Hyman’s special concurrence (¶¶ 41-47) takes the litigants’ attorneys to task for peppering their briefs with intensifiers (adverbs or adjectives used to lend force or emphasis to a word’s meaning). He takes special aim at counsels’ overuse of the words “clearly”, “merely”, “woefully” and “certainly” (think “Plaintiffs have clearly failed to meet their burden of proof here”) and notes a Supreme Court Justice’s (Roberts), a celebrated novelist’s (Stephen King) and a prolific legal writing scholar’s (Brian Garner) mutual disdain for adverbs.

In Hyman’s view, the singled-out adverbs hamper rather than help an author’s prose and detract from her message.

Afterwords:

Sorkin’s case lessons include the contract law principle that a party’s termination of an indefinite contract is not a material breach unless the contract specifies that it can be terminated only for a specific reason or upon the happening of a described event.

The case also makes clear that unchallenged affidavit testimony in support of a summary judgment will be taken as true. A party opposing summary judgment must file counter-affidavits to contradict the movant’s version of events.

Lastly, Sorkin solidifies the proposition that the denial of an amendment to a pleading is proper where it’s clear that a proposed, amended pleading will not cure a defect in an earlier pleading.

 

Non-Member of LLC Lacks Standing to Pursue Statutory and Common Law Claims against LLC Manager – IL First District

Doherty v. Country Faire Conversion, LLC, 2020 IL App (1st) 192385, a dispute concerning a limited liability company (LLC) provides a useful summary of the difference between a company (a) member and (b) transferee of a member’s economic company interest and the financial impact flowing from that distinction.

The plaintiff purchased what she believed was a 25% interest in the LLC at a foreclosure sale for $20,000. Plaintiff claimed that her quarter-interest in the LLC was worth nearly $2M based on the capital contribution made by the entity whose interest Plaintiff purchased.

Plaintiff sued when the LLC sold its lone asset for approximately $5M and refused to distribute any of the sale proceeds to the Plaintiff.

Plaintiff filed suit for declaratory relief, equitable accounting, and breach of fiduciary duty against the LLC’s manager. Her declaratory judgment count sought a court order that she was a 25% member of the LLC, that she was entitled to 25% of the sale proceeds of the LLC’s asset, and that as a member she had a statutory right to inspect the LLC’s books and records.

The trial court entered partial summary judgment that the plaintiff did not own a membership interest in LLC but instead owned only an economic interest in the business. Because of this, the trial court later ruled that plaintiff lacked standing to pursue her accounting and breach of fiduciary duty claims and had no right to inspect the LLC’s books and records.

After a bench trial, the court ruled that the plaintiff held a 13.75% interest (as opposed to the claimed 25% interest) in the proceeds of the LLC’s asset sale and further reduced plaintiff’s share by the defendant LLC manager’s attorneys’ fees incurred in litigating the plaintiff’s claims.

Standing: The Member v. Transferee Difference

The First District affirmed the trial court’s finding that Plaintiff was not a member but had only a 13.75% interest in the sale proceeds and therefore lacked standing to sue for breach of fiduciary duty or to obtain an accounting of the LLC’s business records.

Rejecting the plaintiff’s breach of fiduciary duty claim, the Court noted that  Section 15-20 of the Illinois LLC Act, 805 ILCS 180/1-1 et seq. (the Act), permits an LLC member to sue the company, a manager, or another member for legal or equitable relief to enforce the member’s rights under (i) the operating agreement, (ii) the Act, and (iii) rights arising independently of the member’s relationship to the company.

The Act also provides that a transferee of a distributional interest in an LLC is not entitled to become or exercise rights of a member and has no related right to participate in the management or conduct of the LLC or to demand access to company information.  805 ILCS 180/15-20, 30-5, 30-10.

The Court found that under both the Act and the LLC’s amended operating agreement, plaintiff was only an Economic Interest Holder and not a member. As a result, plaintiff lacked standing to assert its breach of fiduciary duty and accounting claims against the manager and also could not demand production of company records or contest the trial court’s awarding attorneys’ fees to the manager based on indemnification language in the operating agreement.

Distribution of Plaintiff’s Share of LLC Asset Sale Proceeds

The First District also affirmed the trial court’s ruling that plaintiff had a 13.75% interest in the LLC’s profits and losses, as opposed to the 25% membership interest pressed by the plaintiff.

The Court looked to the plain language of the LLC’s amended operating agreement which specifically delineated the Plaintiff’s 13.75% interest in the LLC’s profits and losses.

The First District also affirmed the trial court’s ruling that the LLC manager’s expert witness was more believable than the plaintiff’s. The court ruled that the trial judge was in superior position to rule on the credibility of the parties’ warring expert witnesses and noted that the plaintiff’s expert’s opinions were based on the faulty premise that plaintiff was a 25% member of the LLC (as opposed to a 13.75% interest holder).

Afterwords:

Doherty cements Illinois courts’ continued recognition of the key distinction between a limited liability company’s member and economic interest holder. Only the former has standing to pursue statutory and common law claims against an LLC’s manager. The latter’s interest, by contrast, is relatively passive and consists only of a right to receive monetary disbursements.

Another case lesson is that business litigators should carefully parse the controlling operating agreement and the LLC Act when litigating claims involving LLC members or manager.

Other important take-aways include that a trial court’s finding on credibility of dueling expert witnesses is entitled to deference by an appeals court and attorneys’ fees are only awarded where a contract or statute so provides.