Archives for August 2014

‘You Do An Awfully Good Impression Of Yourself.” (An Ode To ‘Less Than Zero’)(With Some Law Thrown In)

 

 

Less Than Zero, the 1987 movie adapted from Bret Easton Ellis’ first novel, easily makes my short-list of decade-defining movies for multiple reasons.  There’s the sterling soundtrack, for one.  The Cult’s “Lil Devil” (from Electric – one of the best alt-rock albums of all-time IMHO) and the Bangles’ saturnine yet up-tempo reworking of Simon & Garfunkel’s ethereal “Hazy Shade of Winter” are just two of the songs that fit the movie’s tenor and impressionistic sensibility perfectly.

There’s also the “BEE” cool factor.  Mr. Ellis would later pen seminal 80s and 90s tomes American Psycho (the chapter titled “Rat” is one of the most disturbing chapters in all of literature I’d venture), Glamorama, and The Informers among others.  These offerings, written in Ellis’ acid satirical style, firmly entrenched him in the pop-culture pantheon of fiction writers (BEE, Douglas Coupland, Jay McInerney) from that “brat pack” Era.

LTZ’s acting is top-notch, too.  (Where to start) Andrew McCarthy gives a frantic, wide-eyed rendering of the straight-laced protagonist Clay Ellis who returns home from his sheltered East Coast college to find an unrecognizable and degenerate LA cityscape.

80s poster queen Jami Gertz’s sultry turn as Blair – the good-girl-gone-bad (or at least Fast) and James Spader’s sinister and chilling Rip (“old habits don’t die; they just hibernate”) – the sadistic and morally bankrupt drug dealer – each add character texture and visceral complexity to the film.

Then (you knew this was coming) there’s the star-crossed Julian Wells character.  Robert Downey Jr.’s feverish, foaming-at-the-mouth portrayal of the rock-bottom, tragi-comic addict for whom one is too many and a thousand is never enough serves as a lurid example of life imitating art and cements Downey Jr’s status as a cinematic force for the next three decades (or more?).

So, why am I rhapsodizing about LTZ in a law blog?  Nostalgia for one; and because in Southern Financial Group, LLC v. McFarland State Bank, 2014 WL 3973787 (7th Cir. 2014), the Seventh Circuit – applying Wisc. law – analyzed whether a contractual damages provision that resulted in “less than zero” recovery for the plaintiff loan buyer was enforceable.

The plaintiff bought a portfolio of 19 distressed properties from the defendant loan seller for about 28 cents on the dollar.  The contract limited the buyer’s damages to the repurchase price of the loan portfolio or actual damages, which were capped at the amount plaintiff paid for the various loans.

When the plaintiff found out that three of the 19 properties had been released, it sued the defendant for the lost profits that plaintiff attributed to those three properties.  Before it sued though, the plaintiff sold 13 of the properties and earned about a $400,000 profit over what it paid to buy the loans.

Defendant moved for summary judgment based on the contractual damage limitation provision that capped the defendant’s damages at (a) the amount plaintiff paid for the loan package, minus (b) any amounts plaintiff received in mortgage payments on any of the properties.

The defendant argued that the plaintiff actually received more than it would have received under this repurchase formula when it liquidated 13 of the 16 properties.  As a result, according to the defendant, the plaintiff’s actual damages under the contract’s repurchase formula were less than zero since the plaintiff made more by selling the properties than it would have gotten if the defendant bought back the loans.

The Court agreed and granted summary judgment for the defendant.

Held: Affirmed.

Q: Why?

A: In Wisconsin, contracting parties are able to agree to limit damages for breach of contract and to disclaim consequential damages, as long as the damage limitations are not unconscionable.  Wisconsin also allows parties to a contract to limit each side’s risk of default at the outset of a contract.

The Court rejected defendant’s argument that the damage limitation failed its essential purpose under UCC Article 2 (where a limited remedy fails its essential purpose, the limitation is void).  It held that a contract remedy fails of its essential purpose where the remedy is completely ineffectual, is illusory or deprives the buyer of the benefit of his bargain.

A contract law axiom posits that a contract should give at least a “fair quantum of remedy” to the non-breaching parties.  A prime example of a contract remedy failing its essential purpose is where a goods contract limits a buyer’s remedy to repair and replacement and the seller refuses to repair or replace the defective item. (*3-4).

Here, the contract remedy was basically rescission: it allowed the loan buyer to have its loan purchase price repaid in exchange for returning the loan portfolio to the seller.  However, the plaintiff chose not to rescind the contract (rescission puts each side back to its pre-contract setting).  Instead, it sold 13 of the 16 properties and ended up earning several hundred thousand dollars in profits.

Since the plaintiff got more by selling the various properties than it would have gotten had it exercised the contractual repurchase provision, plaintiff suffered no actual damages.  It would have reaped a windfall if, in addition to collecting the profits from the sale of the properties, plaintiff could have forced the defendant to buy back the loans under the contract’s damage formula.  (*5).

Take-aways: Another example of the Court holding commercially sophisticated parties to the terms of their contract.  Absent a disparity in bargaining power or a stronger party taking advantage of a weaker one, a contractual damage limitation will be upheld.  The case also reaffirms the policy against double-recovery.

Where a plaintiff is able to earn more by accepting the benefits of the contract than he would have received by suing for breach, the plaintiff will be held to that choice.  He can’t have it both ways by keeping monetary profits on one hand and simultaneously suing to undo or rescind the same transaction.

Getting Jurisdiction Over A Foreign Corporation – IL Case Note

Q: Can Spanish companies be subject to Illinois jurisdiction where the companies’ U.S.-based subsidiaries signed contracts that contained an Illinois forum selection clause. 

A: Yes

 In , LLC v. Acciona, 2014 IL App (1st) 123403, the plaintiff entered into a multi-million dollar contract with two U.S. subsidiaries of the Spanish corporate defendants to develop power plants.

The US entities were owned by one or more companies owned by the defendants.

The operative contract documents contained forum selection clauses fixing Illinois as the site for litigation.  When the deal fell through, plaintiff sued the foreign parent companies for damages.

The defendants moved to dismiss on the basis that they lacked sufficient contacts with Illinois and didn’t sign the contract.  The trial court denied the motion and the defendants appealed.

Held: Affirmed.  The foreign defendants are “closely related” enough to the underlying contracts and parties to be subject to Illinois jurisdiction. 

Reasons:  

  • To sue a nonresident defendant in IL the plaintiff has the burden of showing a basis for personal jurisdiction;
  • Illinois courts can assert general or specific jurisdiction;
  • General jurisdiction over a nonresident requires a showing of continuous and systematic business contacts such that it can be sued for matters unrelated to its contacts with Illinois;
  • Specific jurisdiction requires a showing of minimum contacts –that a defendant purposefully directed its activities at Illinois and the litigation arises from those activities;
  • A corporation is subject to general jurisdiction where it is organized under Illinois law or is doing business in Illinois;
  • The Illinois long-arm statute (735 ILCS 5/2-209) permits jurisdiction over a foreign defendant on any basis permitted by the Illinois Constitution and U.S. Constitution;
  • If an out-of-state defendant’s contacts with Illinois are sufficient to satisfy state and federal due process concerns, the Illinois long-arm statute is satisfied;
  • Federal due process requires that a foreign defendant have certain minimum contacts with a forum such that maintenance of the suit doesn’t offend traditional notions of fair play and substantial justice.

 ¶¶ 34-37.

The trial court found jurisdiction on the basis that the foreign defendants were “closely related” to the dispute such that it was foreseeable they would be bound by the forum selection clause. 

In Illinois, forum selection clauses are construed broadly to include related claims ancillary to the contract.  The clauses are generally valid and enforceable and a non-party can be bound by them if it is closely connected to the dispute.  (¶¶ 36-37). 

Where there is a sufficiently close relationship between the non-party, the dispute and the contracting parties, the non-party is considered to impliedly consent to the forum selection clause and a foreign state’s exercise of personal jurisdiction over it.  (¶¶ 43-44).

Applying these principles, the Court found the defendants subject to specific jurisdiction in Illinois.  The Court pointed to the broad forum selection text and the fact that the defendants controlled all business aspects of their subsidiaries; including funding, hiring and firing decisions.

The Court also noted the U.S. subsidiaries had few employees, scant business operations and in one case, was purely a stockholding vehicle for the defendants’ multi-national business ventures.  (¶¶ 47-48).

Afterwords:

– Forum selection clauses are construed and enforced to the letter in Illinois- especially in contracts involving sophisticated commercial parties with equal bargaining power;

– a parent company that sufficiently controls or is intermixed with its subsidiary’s business affairs can be bound by a forum selection clause signed by the subsidiary.

 

 

 

 

 

 

  

 

Online Merchant Has No Duty to Protect Victims From Criminal Acts – Seventh Circuit 8.12.14

armslistThe Seventh Circuit recently examined the nature and scope of the legal duty owed by an Internet retailer to prevent a criminal attack on a third party.  In Vesely v. Armslist, LLC, (http://docs.justia.com/cases/federal/appellate-courts/ca7/13-3505/13-3505-2014-08-12.pdf) the plaintiff filed a wrongful death suit on behalf of his sister who was murdered by someone who purchased a handgun on Armslist.com (http://www.armslist.com), an electronic “firearms marketplace” that brokers gun sales between private parties.

The assailant (now serving a life sentence and not party to the civil suit) bought a gun off of Armslist from a private seller in Seattle, Washington.  He later shot the plaintiff’s sister after she spurned his (the gun buyer’s) advances.  Plaintiff sued the website operator, alleging wrongful death (predicated on negligence), statutory survival and a family expense claims.  All of plaintiff’s claims were premised on the allegation that the defendant had a duty to protect third parties from the criminal acts of users of the website.  The District court found there was no duty and granted the defendant’s motion to dismiss (12(b)(6) motion)).  The plaintiff appealed.

Held: Affirmed.  Gun selling site owes no duty to control the conduct of on-line purchasers.

Reasons:

The website operator didn’t owe the plaintiff a duty to protect third parties from the criminal acts of gun buyers.  In Illinois, the essential negligence elements are a duty of care owed by a defendant to the plaintiff, violation of that duty and an injury resulting from the violation.  Breach of duty and proximate cause are fact questions for a jury while the existence of a duty is a matter of law for the court to decide.

A private individual normally doesn’t owe a duty to affirmatively protect another from a criminal attack unless there is a ‘special relationship’ between the parties.  The four categories of special relationships are: (1) common-carrier and passenger (i.e. a train); (2) innkeeper and guest (i.e. hotel); (3) custodian-ward; and (4) business invitor and invitee.  (Armslist, p. 5).

Aside from the special relationship duty rule, courts can find a legal duty on public policy grounds.  The public policy factors that inform the court’s duty calculus are (1) reasonable foreseeability of the injury; (2) likelihood of the injury; (3) the magnitude of the burden of guarding against the injury; and (4) the consequences of placing the burden (of guarding against the injury) on the defendant. (p. 6).

A defendant also has a duty to refrain from “affirmative conduct” that creates a risk of injury to others and from actively assisting someone’s wrongful act.  But where the act that causes harm is criminal conduct (like the murder, here), there must be a special relationship for liability to attach. (p. 6).

The Court found the Armslist web operator had no legal duty to the plaintiff or his sister.  Since the operative act was a crime – a shooting – the special relationship rule applied.  The Court made a distinction between actively assisting gun buyers’ to commit crimes and simply serving as conduit for on-line gun purchases.  Since the defendant merely enabled consumers to use its site to buy guns, this didn’t equate to actively encouraging the buyers to commit illegal acts.  (p. 7).  And since there is no special relationship involving on-line merchants and consumers, there was no duty as a matter of law.

To bolster its holding, the Seventh Circuit noted that the Armslist site is a legal service and that the site contains profuse disclaimers that require the user’s acknowledgement that the defendant isn’t responsible for looking into whether parties to the on-line transaction have legal capacity to buy and sell guns.  Armslist’s standard terms also require the gun advertiser to certify that he/she will obey all applicable gun laws and will consult the ATF with firearms questions. (p. 2).  In light of these disclaimers and because there was no special relationship between Armslist and any of its users’ future crime victims, plaintiff was unable to establish that the defendant website operator owed a legal duty.

Afterwords:

A victory for on-line merchants who traffic in dangerous things and a corresponding  loss for gun control advocates.  The Court refused to saddle a classified advertising site with a legal duty to unknown third parties.  The Court enforced the defendant’s clear disclaimers that emphasized that it was not vetting either the gun seller’s or buyer’s qualifications for gun purchases or any red flags in their personal histories.

The Court solidifies the negligence law proposition that the existence and reach of a duty has limits – especially in the Internet sales context. If there is no recognized special relationship, there is no legal duty to protect against intervening criminal acts.