E-Mails, Phone Calls, and Web Activity Aimed at Extracting $ From IL Resident Passes Specific Jurisdiction Test – IL First Dist.

In Dixon v. GAA Classic Cars, LLC, 2019 IL App (1st) 182416, the trial court dismissed the Illinois plaintiff’s suit against a North Carolina car seller on the basis that Illinois lacked jurisdiction over the defendant.

Reversing, the First District answered some important questions concerning the nature and reach of specific jurisdiction under the Illinois long-arm statute as informed by constitutional due process factors.

Since the defendant had no physical presence or office in Illinois, the question was whether the Illinois court had specific jurisdiction [as opposed to general jurisdiction] over the defendant.

Specific jurisdiction requires a plaintiff to allege a defendant purposefully directed its activities at the forum state and that the cause of action arose out of or relates to those contacts.  Even a single act can give rise to specific jurisdiction but the lawsuit must relate specifically to that act. [¶ 12]

In the context of web-based companies, the Court noted that a site that only imparts information [as opposed to selling products or services] does not create sufficient minimum contacts necessary to establish personal jurisdiction over a foreign defendant.  Here, though, the defendant’s site contained a “call to action” that encouraged visitors like the plaintiff to pay the defendant.  [¶ 14]

The court found that plaintiff’s allegations that defendant falsely stated that the Bronco’s frame was restored, had new brakes and was frequently driven over the past 12 months [when it hadn’t] were sufficient to allege a material misstatement of fact under Illinois fraud law.  It further held that fraudulent statements in telephone calls are just as actionable as in-person statements and can give an Illinois court jurisdiction over a foreign defendant.  [¶ 17]

Viewed in the aggregate, the plaintiff’s allegations of the defendant’s Illinois contacts were enough to confer Illinois long-arm jurisdiction over the defendant.

The plaintiff alleged the defendant (i) advertised the Bronco on a national website, and (ii)  e-mailed and telephoned plaintiff several times at his Illinois residence.

Next, the court considered whetherspecific jurisdiction over the defendant was  consistent with constitutional due process considerations.

The due process prong of the personal jurisdiction inquiry focuses on the nature and quality of a foreign litigant’s acts such that it is reasonable and fair to require him to conduct his defense in Illinois.

Factors the court considers are (1) the burden on the defendant to defend in the forum state, (2) the forum’s interest in adjudicating the dispute, (3) the plaintiff’s interest in obtaining effective relief, (4) the interstate judicial system’s interest in obtaining the most efficient resolution of the case, and (5) the shared interests of the several states in advancing fundamental social policies.

Once a plaintiff shows that a defendant purposely directed its activities at the forum state, the burden shifts to the out-of-state defendant to show that litigating in the forum is unreasonable.

The Dixon court held the defendant failed to satisfy this burden and that specific jurisdiction over it was proper.

Next, the Court declined to credit defendant’s Terms & Conditions (“T&C”) – referenced in the Defendant’s on-line registration form and that fixed North Carolina as the site for any litigation.

Generally, one written instrument may incorporate another by reference such that both documents are considered as part of a single contract.  However, parties must clearly show an intent to incorporate a second document.

Here, the court found such a clear intent lacking. Defendant did not argue that it sent the T&C to Plaintiff or referenced them in its multiple e-mail and telephone communications with Plaintiff.

The court also pointed out that defendant’s registration form highlighted several of the T&C’s terms.  However, none of the featured [T&C] terms on the registration form mentioned the North Carolina venue clause.  As a result, the bidder registration form didn’t evince a clear intent to incorporate the T&C into the contract.

Afterwords:

A foreign actor’s phone, e-mail and on-line advertisements directed to Illinois residents can meet the specific jurisdiction test;

Where a Terms and Conditions document contains favorable language to a foreign defendant, it should make it plain that the T&C is a separate document and is to be incorporated into the parties’ contract by using distinctive type-face [or a similar method];

If the defendant fails to sufficiently alert the plaintiff to a separate T&C document, especially if the plaintiff is a consumer, the defendant runs the risk of a court refusing to enforce favorable (to defendant) venue or jurisdiction provisions.

 

 

Former LLC Member’s Claim for Distributions Not Tangible Enough to Undergird Conversion Claim – IL ND

The Northern District of Illinois considers a plethora of signature complex litigation issues in FW Associates, LLC v. WM Associates, LLC, 2019 WL 354953 (N.D.Ill. 2019), the culmination of a years’ long dispute between LLC members over ownership and management of Smart Bar –  a company that made an automatic cocktail dispenser [the Smartender].

After a flurry of lawsuits and an arbitration hearing that resulted in a nearly half-million dollar money judgment, the judgment creditor plaintiff brought fraudulent transfer claims against a former LLC member and his family-owned entity to whom the ex-member transferred his Smart Bar ownership interest.

The former member and his family enterprise swiftly countersued to dissolve Smart Bar, to force plaintiff to buy-out the member’s Smart Bar interest, and for conversion of the counter-plaintiff’s distributional interest in Smart Bar.

Granting the plaintiff/counter-defendant’s motion to dismiss all counts of the Counterclaim, the Court first rejected the Counter-Plaintiffs LLC Act claims under Sections 15-20 and 35-1.  It held that the individual Counter-Plaintiff lacked standing to sue under the former section as he was no longer a Smart Bar member.  The court nixed the counter-plaintiff’s Section 35-1 buy-out claim because he failed to sue the Smart Bar entity as a necessary party defendant. According to the Court, Section 35-1 does not provide an independent basis for a member to sue another member for a buyout.

In rejecting the conversion claim [premised on the claim that Plaintiffs pilfered the individual Counter-Plaintiff’s distributional interest in Smart Bar], the Court focused on the intangible nature of LLC distributions. Illinois courts do not recognize claim for conversion of intangible rights.  A conversion action to recover funds based on bare obligation to pay money is not actionable.

Citing another Federal case as precedent, the Court found that a member’s right to LLC distributions was too nebulous to anchor a conversion suit. Conversion requires theft of tangible property or property readily reduceable to cash.  Since the expectancy interest in future distributions couldn’t quickly be monetized, the Court found that the claim to future LLC distributions would not support a conversion claim.

The Court then considered Plaintiff’s res judicata and collateral estoppel defenses.

Claim preclusion, or res judicata, applies where (1) there is a final judgment on the merits rendered by a court of competent jurisdiction; (2) an identity of cause of action exists; and (3) the parties or their privies are identical in both actions.

Whether the causes of action are identical turns on whether “they arise from a single group of operative facts, regardless of whether they assert different theories of relief.”

The Court found res judicata did not bar the Counter-claim because there was no identity of causes of action between the earlier arbitration hearing and the instant case.  The Court noted that the counterclaim related to facts arising after the arbitration hearing – including the wrongful removal of two Smart Bar board members and plaintiffs’ clandestine purchase of member interests without notice to the counter-plaintiffs.  Since the predicate counterclaim allegations involved actions that post-dated the arbitration hearing, the claims were not barred by claim preclusion.

Issue preclusion, a/k/a collateral estoppel, applies where (1) the issue decided in the prior adjudication is identical with the one presented in the suit in question, (2) there was a final judgment on the merits in the prior adjudication, and (3) the party against whom estoppel is asserted was a party or in privity with a party to the prior adjudication.

Here, the court found that there was clearly a final judgment on the merits and the same parties involved.

The Court also found element (1) was satisfied.  It ruled that the arbitrator’s ruling on whether the individual defendant/counter-plaintiff breached the Smart Bar Operating Agreement was an identical issue raised in the Federal case.  This was so because three counts of the Counterclaim sought to enforce the terms of the Operating Agreement.

Since the counterclaim turned on whether the counter-plaintiff satisfactorily performed his Operating Agreement duties, and the arbitrator ruled definitively that he did not, the counterclaim counts alleging [Smart Bar] Operating Agreement infractions were barred by collateral estoppel/issue preclusion.

Afterwords:

To sue for a forced buy-out under Section 180/35-1(b) of the LLC Act, the claimant must name the LLC entity as party defendant.  The statute provides no independent basis for an aggrieved LLC member to sue another member.

A conversion suit won’t lie for a member suing to recover a judgment debtor’s LLC distribution.  Future and unknown LLC distributions are too ephemeral to support a conversion action.  If a distribution isn’t readily reduceable to cash money, the conversion claim will fail.

An arbitrator’s ruling can satisfy the final judgment on merits component of both claim preclusion [res judicata] and issue preclusion [collateral estoppel]