Amended Complaints and Quantum Meruit – Some Illinois Reminders

Earlier (http://paulporvaznik.com/quantum-meruit-basics-illinois-law/1367) I discussed how quantum meruit is a valuable fallback or “Plan B” theory of recovery when a client has done work for someone, hasn’t been paid and there is no governing express contract between them.  Quantum meruit (translation: “as much as he deserves”) ensures that my client at least gets something where his  services have benefitted a defendant who welcomed the services or stood silently as my client performed them.

Blietz v. System Integration, 2014 IL App (1st) 132270-U examines the pleading elements of quantum meruit and the importance of assigning a monetary value to the services that form the basis for the quantum meruit suit.

There, the Plaintiff sued his former employer – an architecture firm – to recover about $300K in unpaid compensation for accounting and marketing services the plaintiff rendered for the firm.  He brought claims for breach of contract, a statutory wage payment and collection act claim and an alternative quantum meruit action.

The trial court dismissed the claims for lack of factual specifics and the architect appealed.

Held: Affirmed

Q: Why:

A: The appeals court affirmed dismissal of the plaintiff’s breach of contract and wage payment claim on purely procedural grounds.  When a plaintiff files an amended complaint, he waives objections to the court’s ruling on prior complaints.  Where an amendment is complete in itself and doesn’t refer to or adopt the prior pleading, the prior pleading ceases to be part of the record and it’s viewed as abandoned.  A party only needs to reference an earlier pleading in a footnote or a single paragraph to preserve it for appellate review.

Here, by failing to adopt or reference his breach of contract and wage count claims in his most recent pleading, these claims were abandoned and unappealable.

The court also affirmed plaintiff’s quantum meruit dismissal.  To recover in quantum meruit, the plaintiff must plead (1) he performed services, (2) that benefitted a defendant, (3) that it’s unjust for the defendant to reap the benefits of the plaintiff’s services without paying the plaintiff. 

The quantum meruit plaintiff has the burden to show the defendant received the plaintiff’s services and that it would be unjust for the defendant to retain the services without paying for them.  Critically, the plaintiff must prove his services were of “measurable benefit” to the defendant.  (¶25).

The plaintiff’s quantum meruit claim failed on its face.  The plaintiff didn’t monetize the value of his unpaid work but did say he was paid over $96K during his tenure with the defendant.  By doing so, plaintiff had to plead that he performed work that had a value over and above the $96K paid to him.  Because the plaintiff couldn’t plead work that exceeded the $96K paid him, he failed to allege that he conferred a measurable benefit on the defendant.

Plaintiff’s bare allegations that he “created value” for defendant and “greatly increased” the defendant’s company value during plaintiff’s tenure were too nebulous to survive a motion to dismiss.  Under Illinois fact-pleading rules, these bare bones allegations with no factual support didn’t provide a calculable amount of the claimed services.  As a result, plaintiff’s quantum meruit claim failed.  (¶ 29).

Afterwords:

A.  To preserve your right to appeal a dismissed count, you should reference it in the amended pleading – otherwise the count is abandoned and can’t be appealed;

B.  Quantum meruit only applies where there is no express contract or a contract formation defect (e.g. uncertain price term, duration, etc) that makes a basic breach of contract claim impossible;

B.  The quantum meruit plaintiff must do more than nakedly plead that he performed services that benefitted a defendant.  He must instead allege he provided quantifiable value to the defendant and also plead surrounding facts that show it’s unfair for the defendant to enjoy the fruits of the plaintiff’s services without paying him.

 

 

Statute Of Frauds Doesn’t Prevent Guaranty Claim Where Main Purpose Is To Benefit Guarantor- IL First Dist.

66381928 Photo credit: www.template.net (1.21.15)

 

I’m surprised at how often I see contracts where it’s unclear whom the parties are.  Sometimes, a contract’s main text will say it’s between two companies but it’s clearly signed by two individuals. I’ve also experienced the reverse: the contract body says it’s between two individuals but the signature block provides that it’s signed by corporate agents on behalf of their corporate employers.  When the contract is breached, it becomes a challenge to sort out who’s entitled to sue and who should be named as defendant.

Sullivan & Crouth Holdings, LLC v. Ceko, 2014 IL App (1st) 133028-U examines the impact of conflicting language in a promissory note and how textual contradictions affect the note’s enforceability.

Plaintiff sued the guarantor defendant for breach of a $100K promissory note (“Note”). The Note was between an LLC borrower and a lender but the Note body provided that the individual defendant (the LLC’s manager) will personally guarantee payment of the Note.

The Note signature line read:

 “MGT Lottery, LLC”

 By: [Peter Ceko]

 Peter Ceko, One of Its Managers

The defendant moved for summary judgment on the basis that he signed the Note purely in his capacity as LLC manager – as reflected by the “one of its managers” notation in the signature line.  He also argued that plaintiff’s claim was barred by the Statute of Frauds, 740 ILCS 80/1 (“SOF”) provisions that require a writing to enforce a promise to pay another’s debt (example: a guaranty).  The trial court agreed and entered summary judgment for the defendant and the plaintiff appealed.

Held: Reversed.

Q: Why?

A: There was a facial inconsistency between the Note and its signature line. The Note clearly reflected the intent for the defendant to personally guaranty the LLC borrower obligations yet the defendant clearly signed the Note as LLC manager.

In Illinois, where language in the body of a contract clashes with the apparent representation by the officer’s signature, it’s  an issue of fact for a jury or judge to decide.

The court found that based on its conflicting language, the Note was ambiguous – it was reasonably subject to differing interpretations.  The murky Note, then, required the parties to submit additional evidence of their intent.

The Court also found there was a question of fact as to whether the SOF defeated the plaintiff’s claim.  The SOF requires the promise to pay the debt of another to be in writing.  An exception to this rule is where the “main purpose” or “leading object” of the promisor is to advance his own business interest.  Whether a promisor’s main purpose is to further his personal interest (as opposed to benefit the promisee) is a fact question that defeats summary judgment. 

The court found the record too sparse to discern the LLC manager’s main reason for signing the Note.  As a result, more evidence was needed and summary judgment was improper.

Afterwords:

– Parties to a contract should take pains to specify whether it’s a corporate or individual obligation;

– Where there is a clash between the body of a written contract and its signature block, this will likely signal a fact question that defeats summary judgment;

– The requirement that a promise to pay a third party’s debt be in writing can be tempered where the promisor is signing a contract to advance his own economic interest

Company Exec Who Bilked His Employer Hit With Multi-Million Salary Forfeiture Judgment

expensereport03The First District affirmed an almost $10M bench trial judgment in favor of a publishing company against one of its former officers in ICD v. Gittlitz, 2014 IL App (1st) 133277.

The defendant engaged in a multi-year course of fraudulent conduct against his employer by issuing bogus expense reports and writing himself  company checks for “advances” that he wasn’t entitled to.  After lodging criminal embezzlement charges, the plaintiff brought civil claims.

The plaintiff sued for compensatory and punitive damages under breach of fiduciary duty and fraud theories.  It also asserted a specific performance claim seeking the defendant’s turn over of his stock shares.

The defendant countered that the plaintiff gave up much of its claims by signing an earlier written release (the “Release”) after the plaintiff first encountered the defendants’ fraudulent conduct. The defendant also claimed the plaintiff was unjustly enriched by retaining certain profits the defendant claimed he was owed.

The trial court found for the plaintiff on all claims and rejected the defenses and counterclaims.

Upholding the hefty money judgment, which included a $2M punitive damage award, the Court answered some important questions on the proper measure of damages for a corporate officer’s breach of fiduciary duty and the circumstances that justify voiding a written release of claims.

The court synthesized this patchwork of legal principles during its analysis:

Corporate shareholders owe fiduciary duties of loyalty to both the corporation and the other shareholders;

– Where an agent breaches a fiduciary duty to a principal, the damage award is within the court’s equitable discretion;

The complete forfeiture of salary during the time the fiduciary was breaching his duty to the corporation is a proper damage measure in cases of intentional misconduct;

– The purpose of the salary forfeiture remedy is to deprive the wrongdoer of his gains from his breach of duty and to deter disloyalty;

-Punitive damages are also awarded at the court’s discretion and can only be nullified if they are the result of passion, partiality or corruption;

A 3:1 ratio (punitive damages to compensatory damages) is recognized as an acceptable (“not excessive”) figure;

– When parties who stand in a fiduciary relationship to each other sign a release that settles or gives up potential claims, the release can be undone if one party withholds material facts surrounding the signing of the release;

– A release will not include claims that weren’t in the parties’ contemplation

(¶¶ 54-77).

The defendant’s several-year campaign of blatant fraud as evidenced in part by the defendant’s guilty plea in the criminal case justified the court ordering the defendant’s wholesale forfeiture of his salary during the operative time span (about $7M).

The court also held that the $2M in punitive damages bore a reasonable relationship to the $1.2M in phony checks cashed by the defendant. The punitive award fell below a 2:1 ratio and so was acceptable under the law.

The court ruled that the Release was voidable by the plaintiff since two corporate shareholders testified that they signed the Release based on the plaintiff’s promise that his fraud against the company was brief.

The court also affirmed summary judgment on the specific performance claim through which the plaintiff sought to compel performance stock repurchase provisions of a shareholders agreement.

The court rejected the defendant’s election of remedies doctrine noting that it only applies to prevent double recovery where a plaintiff seeks inconsistent remedies for the same cause of action.

Normally, a plaintiff can’t recover damages for breach of contract and also obtain specific performance of that same contract. He must choose on or the other. Here, though, election of remedies didn’t apply: plaintiff’s money damages were predicated on the defendant’s fraudulent conduct while the specific performance order related solely to the stock repurchase agreement. ¶¶ 78-80.

Take-aways:

(1) Complete forfeiture of an executive’s compensation is a proper damage remedy where the executive intentionally violates fiduciary duties to the corporation;

(2) A release won’t encompass claims that weren’t in the parties’ contemplation – especially where one party is a fiduciary who hoodwinks the other;

(3) A 3:1 punitive damage:actual damage ratio is generally acceptable and won’t be overturned as excessive.