Archives for August 2015

Michael Keaton Defeats Production Company’s “Merry Gentleman” Breach of Contract Suit – ‘Reliance’ Damages Summary

The ultimate badass introduction. Say this upon meeting someone tough and they’ll never mess with you.”

That’s how no less an authority than Urban Dictionary (who said I wasn’t high-brow?!!) describes “I’m Batman!” – a film-defining movie line that seems to have been catapulted into cultural idiom status. (http://www.urbandictionary.com/define.php?term=I’m+Batman)

Not sure if Michael Keaton unveiled this quiver-inducing Statement as a breach of contract defense but the Seventh Circuit did recently rule in the actor’s favor in a multi-million dollar contract dispute that’s the genesis of Merry Gentleman, LLC v. George and Leona Productions, Inc. (http://caselaw.findlaw.com/us-7th-circuit/1711569.html)

There, the plaintiff production company sued the famed actor and one of his companies for damages, alleging Keaton failed to deliver timely versions or “cuts” of a film, failed to cooperate in the distribution and marketing of the film and was derelict in his film post-production obligations.

The suit concerns 2009’s The Merry Gentleman, a motion picture directed by and acted in by Keaton that was a box office bust but was lauded by some critics, including the late Roger Ebert.  The plaintiff claimed Keaton breached his director duties at the movie’s pre-production, distribution and post-production phases and sought a cool $5.5M in damages – the amount plaintiff claimed it spent producing and marketing the film.  Keaton won summary judgment on the basis that plaintiff couldn’t prove a causal link between Keaton’s’ breach and the plaintiff’s claimed damages.  Plaintiff appealed.

The Seventh Circuit affirmed and in doing so, espoused some key contract damages guideposts.

The two entrenched contract damage schemes are expectation damages and the more remote reliance damages.  Expectation damages apply where a party seeks the “benefit of his bargain”; what he would have received had the breaching party performed.  Reliance damages, by contrast, involve a plaintiff getting reimbursed for loss caused by his reliance on the contract.

Classic reliance damages include preparatory costs: those expenses incurred by a plaintiff in preparing for performance of a contract minus any loss he would have suffered had the contract been performed.  Restatement (Second) of Contracts, § 349.

Reliance damages are designed to compensate a plaintiff who is unable to demonstrate expectation damages.  Reliance damages involve a burden-shifting analysis where a plaintiff must first prove his expense outlay in preparing for performance.  The burden then shifts to the defendant to prove what damages the plaintiff would have sustained if the contract was performed.

While reliance damages present a lower proof hurdle than do expectation damages, the breach of contract plaintiff must still produce evidence that the claimed losses were both caused by the breach and foreseeable.

Typically, reliance damages apply where one party to a contract has walked away without performing.  The plaintiff then recovers the expenses it incurred in its own preparation for performance.  Here, though, the court emphasized, Keaton did perform: he made and acted in the movie.  He also presented Merry Gentleman at the vaunted Sundance Film Festival.

The court said that if Keaton had failed to act in or direct the movie, then maybe the plaintiff could have recovered its reliance expenses.  However, since Keaton substantially performed his contractual obligations (acting and directing), plaintiff failed to prove how the actor’s claimed breaches caused over $5M in damages.  To allow plaintiff’s damages in this case meant that Keaton’s performance as director and actor was completely worthless – that plaintiff lost its entire multi-million dollar investment in the film based on Keaton’s breach.  The court refused to find that the actor’s services entirely lacked value.

Based on the plaintiff’s failure to establish proximate cause (that Keaton’s breach resulted in $5.5M in damages), the Seventh Circuit upheld summary judgment for defendants.

Afterwords:

This case provides a good summary of expectation and reliance contract law damages including when one damage scheme applies versus the other.

Merry Gentleman also illustrates in sharp relief how difficult it is for a plaintiff to recover reliance damages where the defendant substantially performs a contract.  This is especially so in a case like this where the claimed breach is subjective – involving the quality of performance – rather than a more readily measurable breach like a complete failure to perform.

Loss of Earning Capacity and The Self-Employed Plaintiff: What Damages Are Recoverable (IL 4th Dist. Case Note)

The plaintiff in Keiser-Long v. Owens, 2015 IL App (4th) 140612, a self-employed cattle buyer, sued for injuries she suffered in a car accident with the defendant.  The defendant admitted negligence and the parties went to trial on damages.

The defendant successfully moved for a directed verdict on plaintiff’s attempt to recover for lost earning capacity at trial and the Plaintiff appealed.

Reversing, the Fourth District appeals court expanded on the potential damages a personal injury claimant can recover where the plaintiff is self-employed and doesn’t draw a formal salary from the business she operates.

Illinois allows a plaintiff in a negligence suit to recover all damages that naturally flow from the commission of a tort.  Impaired earning capacity is a proper element of damages in a personal injury suit.  However, recovery is limited to loss that is reasonably certain to occur.  Lost earning capacity damages are measured by the difference between (a) the amount a plaintiff was capable of earning before her injury; and (b) the amount she is able to earn post-accident.

Lost earning capacity damages focus on an injured person’s ability to earn money instead of what she actually earned before an injury.  That said, a plaintiff pre- and post-accident earnings are relevant to a plaintiff’s damages computation.  ¶ 37.

Where a plaintiff is self-employed, a court can consider the plaintiff’s company’s diminution of profits as evidence of a plaintiff’s monetary damages where the plaintiff’s services are the dominant factor in producing profits.  By contrast, where a self-employed plaintiff’s involvement is passive and she relies on the work of others to make the company profitable, a profits reduction is not a proper damage element in a personal injury action.

The trial court granted the defendant’s motion for directed verdict since the plaintiff failed to present evidence that she lost income in the form of a salary or bonus from her cattle-buying business.

The appeals court reversed.  It noted that the plaintiff was solely responsible for her company’s profits and was the only one who travelled around the State visiting various cattle auctions and meeting with cattle sellers.  Plaintiff also offered expert testimony that she missed out on the chance to earn some $200,000/year in the years following the accident and that any company profits were labeled “retained earnings” and treated as the plaintiff’s personal retirement plan  ¶¶ 41-43.

The court held that since the plaintiff was the only one whose efforts dictated whether her cattle buying business was profitable or not, her business’s post-accident balance sheet was relevant to her recoverable damages.

The court also rejected the defendant’s argument that since plaintiff’s company was a C corporation (and not an S corp.1), profits and losses did not flow through to the plaintiff, the court should not have considered lost business income as an element of plaintiff’s damages.  The court found that any tax differences between C and S corporations were irrelevant since plaintiff was the cattle company for all intents and purposes.  As a result, any loss suffered by the company was tantamount to monetary loss suffered by the plaintiff.  ¶¶ 45-46.

The court’s final reason for reversing the trial court was a policy one.  Since the plaintiff’s corporation couldn’t sue the defendant, there was no potential for double recovery.  In addition, if the court prevented the plaintiff from recovering just because she didn’t earn a formal salary, this would operate as an unfair windfall for the defendant.  The end result is now the parties must have a retrial on the issue of plaintiff’s lost earning capacity.  ¶¶ 46-47.

Afterwords:

Owens provides a useful synopsis of when impaired earning capacity can be recovered in a personal injury suit.  In the context of a self-employed plaintiff, a plaintiff’s failure to draw a salary per se will not foreclose her from recovering damages; especially where the plaintiff – and not someone working for her – is the one mainly responsible for company profits.  In cases where the plaintiff is self-employed and is singularly responsible for a company’s profits, a loss in business income can be imputed to the defendant and awarded to the business-owner plaintiff.

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A C corporation is taxed at both the corporate level and at the shareholder level.  By contrast, an S corporation is not taxed at the corporate level; it’s only taxed at the shareholder individually. (This is colloquially termed “flow-through taxation.”)

Statute of Limitations and Installment Contracts: What is the Date of Breach and When Does the Limitations Period Start to Run – An IL Case Note

The statute of limitations defense and the equitable doctrine of laches are firmly-entrenched legal devices aimed at fostering finality in litigation.  The limitations and laches defenses both look to the length of time a plaintiff took to file suit and strive to balance a plaintiff’s right to have his claim heard on the merits with a defendant’s competing right to timely defend a lawsuit.

The inherent tension between the goals advanced by the limitations and laches defenses and the legal principle that everyone should have his or her day in court comes into sharp relief in cases involving multi-year contracts that are to be performed over time like a contract payable in annual installments.

Akhtert v. D’avis, 2013 IL App(1st) 113556-U, serves as a recent example of how difficult it can be to apply the statute of limitations and laches defenses where an oral contract doesn’t provide a clear end date and where it calls for yearly installment payments.

The oral agreement there provided that the defendant would use plaintiff’s medical facility to treat defendant’s patients in exchange for paying plaintiff between 40-50% of defendant’s gross income.  The defendant made monthly payments for about two years (from 2002-2004) and stopped.

The plaintiff didn’t sue until nearly seven years later (in 2011) and sought several years’ worth of payments it claimed it was owed by the defendant.  The defendant moved to dismiss plaintiff’s breach of contract claim on statute of limitations grounds and sought dismissal of plaintiff’s accounting action based on laches.  The trial court dismissed plaintiff’s claims as untimely and plaintiff appealed.

Held: Reversed in part.

Q: Why?

A: The court first held that the plaintiff’s breach of contract was timely as to all payments due within five years of the complaint’s 2011 filing date.

The statute of limitations for oral contracts in Illinois is five years, measured from the date where a creditor can legally demand payment from a debtor. 735 ILCS 13-205, (¶14).  Where a money obligation is payable in installments, the limitations period begins to run against each installment on the date the installment becomes due.  Each installment carries its own limitations period.

So, if you have a 2000 oral contract calling for annual payments starting in 2001 and wait until August 31, 2015 to sue, the suit will still be timely as to payments coming due within five years of the filing date (e.g. for all payments due on or after August 31, 2010).

Here, the court found the plaintiff’s suit was timely as to payments coming due on or after March 8, 2006 – five years preceding the 2011 complaint filing date.  Any payments due before March 8, 2006 were time-barred.

Next, the court addressed the defendant’s laches argument – asserted as a defense to plaintiff’s equitable accounting claim.  Laches is a “neglect or omission to assert a right, taken in conjunction with a lapse of time of more or less duration, and other circumstances causing prejudice to an adverse party” and applies where a plaintiff is seeking equitable (as opposed to legal or monetary relief). (¶ 25).

Laches applies where (1) a plaintiff files suit, (2) the plaintiff delays in filing the suit despite having notice of the existence of his claim, (3) the defendant lacks knowledge or notice of the existence of plaintiff’s claim, and (4) injury or prejudice resulting to the defendant by the plaintiff’s delay in filing suit.  Where the period of delay in bringing suit exceeds the applicable limitations period (here – the five-year period for breach of oral contracts), that delay will automatically constitutes laches.

The burden of showing laches is squarely on the defendant.  The mere lapse of time (between plaintiff’s knowledge of facts giving rise to a claim and plaintiff’s filing suit) isn’t enough.  The defendant must also show prejudice: that it is unfair to make him defend plaintiff’s delayed suit.

Here, the defendant couldn’t establish any unfairness in having to defend against plaintiff’s claims so it’s laches claim failed as to payments due within five years of the complaint filing date.

Take-aways:

Contracts payable in installments provide a separate limitations period for each breach;

An oral installment contract claim will be timely as to any payments pre-dating complaint date by five years;

Laches requires more than passage of time/delay between when a plaintiff is first armed with facts giving him a claim and when he actually files suit.  A defendant must also show prejudice – such as inability to track down witnesses and documents – in his ability to mount a defense based on the plaintiff’s lag time in bringing a claim to state a winning laches defense.