Apparent Agency, Ratification and Long-Arm Jurisdiction: IL Law

The First District examines a slew of important substantive and procedural litigation issues in Graver v. Pinecrest Volunteer Fire Dept., 2014 IL App (1st) 123006, a commercial lease dispute pitting an Illinois corporation against a Tennessee corporation and an agent of that corporation.

The parties signed a fire truck lease that called for seven years’ worth of monthly payments.

The lease was signed by defendant’s former treasurer who said he had authority to sign on defendant’s behalf.  Plaintiff sued after the defendant defaulted and won an Illinois default judgment against both the corporate and individual defendants of over $92,000.

About fifteen months later, the corporate defendant moved to vacate the judgment under Code Section 2-1401 (for judgments more than 30 days but less than 2 years old).  It claimed the Illinois court lacked personal jurisdiction over it.   The trial court denied the motion and found that defendant  was subject to Illinois long-arm jurisdiction.

The First District reversed.

Holding that the trial court lacked jurisdiction over the Tennessee defendant, the court catalogued the key Illinois jurisdictional rules for foreign defendants:

the plaintiff has the burden of establishing jurisdiction over an out-of-state defendant;

– Code Section 2-209(c) (Illinois’ long-arm statute) provides that an Illinois court can exercise jurisdiction over a foreign defendant if permitted by the Illinois Constitution and the U.S. Constitution;

– Federal due process requires a foreign defendant to have “minimum contacts” with the forum state and to have “purposely availed” itself of the privileges of conducting activities in the forum state;

– Federal due process involves three factors: (1) whether the defendant had minimum contacts such that it had “fair warning” it may be haled into the forum state’s court; (2) the claim against the foreign defendant arose from or is related to the defendant’s contacts with the forum state; and (3) whether it’s reasonable to require the foreign defendant to litigate in another state;

– For Illinois to have general jurisdiction over an out-of-state defendant, the defendant must have “continuous and systematic” business contacts with the forum state;

– Where specific jurisdiction applies, the foreign defendant can only be sued if the action arises from or is related to the defendant’s conduct in the forum state;

– In a breach of contract suit against an out-of-state defendant, the critical jurisdictional factors are (1) who initiated the transaction; (2) where the contract was formed; and (3) where the contract was performed;

– A choice-of-law contractual provision is relevant, but is not by itself a sufficient basis to subject a defendant to jurisdiction in another state.

(¶¶ 13-17).

Applying these rules, the First District found that Illinois lacked jurisdiction over the Tenn. defendant.  First, there was no general jurisdiction since the corporation’s contacts with Illinois were sparse: they weren’t continuous and systematic.  Also, the agent who signed the lease lacked authority to bind the defendant.  It offered an uncontested affidavit that established the agent was never authorized to sign contracts for the defendant.  The court also found that since defendant didn’t know about the lease until after the default judgment was entered, there was no ratification of the agent’s signing the lease.  ¶¶ 19-20.

The Court reversed the trial court’s jurisdiction ruling and voided the judgment against the defendant.

Take-aways: For an out-of-state corporation to be subject to Illinois specific jurisdiction, its contacts with Illinois must form the basis for the lawsuit.  In addition, where a plaintiff is trying to impute an agent’s actions to a corporate principal, the plaintiff must show that the principal said or did something to create in the plaintiff the reasonable belief that the agent could bind the principal.  My question is why didn’t the plaintiff file a counter-affidavit which detailed the actions of the agent and principal which led the plaintiff to assume the agent had authority to bind the principal? It’s not clear whether it would have made a difference; but a counter-affidavit would have at least given the plaintiff a fighting chance.

Lawyer’s Breach of Fiduciary Duty and Constructive Trust Claim Against Ex Law Partner Barred By 5-Year Statute of Limitations

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Jimmy Connors is one of my all-time favorite tennis players and professional athletes.  Not just because he was such a fiery competitor who seemed to literally spill his blood and guts every time he took the court.  But because of his racket.

In an era dominated by space-age racket technologies like Kevlar, ceramics and various graphite-fiberglass amalgams, Connors stuck with his trusty Wilson T2000 – a primitive piece of steel with a wrap-around string aesthetic and microscopic sweet spot.  

There was just something about seeing the consummate throwback Connors, and his anachronistic Tool of his Trade,  continually vanquish a parade of younger adversaries with their ultra-modern tennis accoutrements that resonated with the purist in me.

That’s why Brennan v Constance, 2014 IL App (5th) 110555-U (2014), a lawsuit involving two former law partners fighting over legal fees owed by the tennis legend, naturally piqued my interest.

Facts:

The plaintiff and defendant was ere law partners in a three-person firm (the Firm).  Connors was a long-time Firm client.  

When the Firm disbanded, a major sticking point was fees owed the Firm by Connors for previous services.  Defendant believed the fees were his (since Connors was originally his client) while the other Firm members viewed the Connors fees owed to the Firm.

After more than a decade of litigation, Connors paid nearly $11 million to the Firm.  Defendant received nearly $7 million, while a former Firm partner got about $4M.

Plaintiff sued to impose a constructive trust over a portion of the $7 million in fees recovered by defendant because plaintiff believed defendant misled him concerning the amounts owed from the tennis great.

After a three-week bench trial, the Court entered judgment in plaintiff’s favor and imposed a constructive trust on the fees and awarded plaintiff more than $1.64 million – an amount equal to 25% of the Connors fees paid to defendanT.

Held: trial court reversed.  Plaintiff’s suit is time-barred.

Rules/Reasoning:

Plaintiff’s suit was barred by the five-year statute of limitations governing breach of fiduciary duty claims. 

Code Section 13-205’s five-year limitations period governs constructive trust and fiduciary duty claims.  ¶ 60, 735 ILCS 5/13-205.  A statute of limitations starts running when the cause of action accrues (when facts exist which authorize bringing the action).  

The “discovery rule” tolls (stops) the running of a limitations period until an injured plaintiff knows or should know he has been injured. 

Fraudulent concealment of a claim also tolls the limitations period.  ¶ 61.  In “passive” concealment cases, the plaintiff must show that defendant concealed a material fact that he was under a duty to disclose.  ¶ 63.   However, a plaintiff who knows he has been injured has a duty to investigate further and the limitations period will run when the plaintiff is put on “inquiry notice.”  A plaintiff doesn’t have to know the full extent of his injuries before the statutory clocks start ticking.

In reversing the plaintiff’s judgment, the 5th District found the plaintiff was on inquiry notice as early as 2004 (when he admittedly first learned of an aborted stock transfer that would have netted the Firm millions) but didn’t sue until 2010.  Since plaintiff missed the five-year limitations period, his suit was too late.

The Court also rejected plaintiff’s fiduciary duty argument: that since defendant owed plaintiff a fiduciary duty as a former law partner, it relaxed the limitations period.  The Court disagreed.  It held that while a fiduciary relationship may excuse an initial failure to investigate, it won’t lengthen the time to sue where a plaintiff knows of possible wrongdoing and fails to act on it.  ¶¶ 70-71.

Afterwords: This case illustrates the harsh results for  litigants who sits on their rights.  While a fiduciary relationship can bolster a fraudulent concealment argument and toll a limitations period, if facts exist that should put a reasonable person on inquiry notice of a wrongful act, the limitations period will run from the date of that notice.

 

Rescission Based On Mistake and Fraud: An IL Case Note

Blackhawk State Bank, Inc. v. Al’s Motorhome and Trailer Sales, Inc., 2013 IL App (2d) 130316-U (2013), illustrates in stark relief the perils of entering high-dollar “handshake” real estate contracts.  

The plaintiff bank sued to foreclose on farm land after a borrower (the “Seller”) defaulted on a multi-million dollar loan.  The loan was used to fund the Seller’s mobile home business. 

But before the bank’s foreclosure suit, the Seller “sold” the property to defendant for $825,000 as part of a handshake agreement.  The Seller never told defendant about the bank’s nearly $7M mortgage on the land and the defendant never asked. 

The defendant also never ordered a title search and didn’t check tax records either.  He took the Seller’s word on all aspects of the deal and no written contract was prepared to document it.

Defendant paid the Seller $825,000 to buy the farm land in two installments.  But instead of crediting defendant’s payments to the purchase price, the Seller – used the funds to pay down the mortgage held by the plaintiff.

When defendant learned of the bank’s mortgage on the property, he sought the return of his first $425,000 payment.  The bank said no and filed a foreclosure suit because the underlying loan was by that time in default. 

The defendant counter-sued for unjust enrichment and rescission based on mistake and fraud.  The trial court dismissed the defendant’s rescission claims on the bank’s motion to dismiss and on the unjust enrichment claim, entered judgment for the bank after a bench trial. Defendant appealed.

The defendant’s unjust enrichment claim failed because he couldn’t show that he had a superior right over the bank to the $425,000 in purchase funds. 

To prove unjust enrichment, a plaintiff must show that the defendant unjustly retained a benefit to plaintiff’s detriment and that defendant’s retention of the benefit violates fundamental principles of justice, equity and good conscience. 

In situations where the benefit flows from a third party, unjust enrichment applies where the plaintiff has a better claim to the benefit than the defendant.  ¶¶ 15-18.

The Court found that the bank had a “better claim” to the sale proceeds than did defendant.  This was because the bank had no knowledge of defendant’s handshake deal with the Seller and the bank was owed millions of dollars from the bankrupt Seller. 

The Court also focused on defendant’s own negligence in not performing any due diligence concerning the property and exhibiting a “lax approach” to a high-dollar transaction with a complete stranger seller.  ¶¶ 30-33.

The court also upheld the dismissal of defendant’s rescission claims.  To state a claim for rescission premised on mistake, a plaintiff must show: (1) a serious and material mistake, (2) the mistake is so important that enforcement of the contract would be unconscionable; (3) the mistake occurred even though the party claiming rescission exercised due care; and (4) rescission can place the parties in the status quo.   ¶ 44.

The Court rejected defendant’s rescission-due-to-mistake arguments because defendant couldn’t establish that he exercised due care in the transaction.

The defendant land buyer failed to perform even rudimentary research on the property that would have shown the bank’s multi-million dollar mortgage lien.  This precluded a finding that defendant made a mistake that merited undoing the contract. ¶¶ 45-47.

The defendant’s fraud-based rescission claim – based on the Seller falsely telling defendant he owned the property free and clear – also failed.  The defendant couldn’t establish that he reasonably relied on the Seller’s statement.  Since defendant entered into a significant real estate transaction with (figuratively) eyes closed, he couldn’t plead or prove the reasonable reliance element for rescission based on fraud. ¶¶ 48-49.

AfterwordsBlackhawk shows how critical the “due care” element is for both a valid unjust enrichment and rescission claim.  If a litigant is unable to show that he exercised reasonable care in a transaction, his chances of undoing a transaction (rescission) or getting monies returned to him (via unjust enrichment) are slim to none.