Archives for December 2015

Stipulation In Earlier Case Subjects LLC Member to Unjust Enrichment and Constructive Trust Judgment in Check Cashing Dispute – IL 1st Dist.

In a densely fact-packed case that contains an exhausting procedural history, the First District recently provided guidance on the chief elements of the equitable unjust enrichment and constructive trust remedies.

National Union v. DiMucci’s (2015 IL App (1st) 122725) back story centers around an anchor commercial tenant’s (Montgomery Ward) bankruptcy filing and its corporate landlord’s allowed claim for about $640K in defaulted lease payments.  In the bankruptcy case, the landlord assigned its approved claim by written stipulation to its lender whom it owed approximately $16M under a defaulted development loan.

The bankruptcy court paid $640K to the landlord who, instead of assigning it to the lender, pocketed the check.  The lender’s insurer then filed a state court action against the landlord’s officer (who deposited the funds in his personal account) to recover the $640K paid to the landlord in the Montgomery Ward bankruptcy.  After the trial court granted summary judgment for the plaintiff on its unjust enrichment and constructive trust counts, the defendant appealed.

Affirming the trial court’s judgment for the plaintiff, the First District first focused on the importance of the stipulation signed by the landlord in the prior bankruptcy case. The court rejected the landlord’s argument that his attorney in the bankruptcy case lacked authority to stipulate that the landlord would assign its $640K claim to the plaintiff’s insured (the lender). 

A stipulation is considered a judicial admission that cannot be contradicted by a party.  But it is only considered a judicial admission in the case in which it’s filed.  In a later case, the earlier stipulation is an evidentiary admission that can be explained away.

The law is also clear that a party is normally bound by his attorney’s entry into a stipulation on the party’s behalf. This holds true even where the attorney makes a mistake or is negligent.  Where an attorney lacks a client’s express authority, a client is still bound by his attorney’s conduct where the client fails to promptly seek relief from the stipulation. To undo a stipulation entered into by its attorney, a party must make a clear showing that the stipulated matter was untrue. Since the landlord failed to meet this elevated burden of invalidating the stipulation, the court held the landlord to the terms of the stipulation and ruled that it should have turned over the $640K to the plaintiff.

Unjust Enrichment and LLC Act

Next, the court examined the plaintiff’s unjust enrichment count. Unjust enrichment requires a plaintiff to show a defendant retained a benefit to plaintiff’s detriment and that the retention of the benefit violates basic principles of fairness. Where an unjust enrichment claim is based on a benefit being conferred on a defendant by an intermediary (here, the bankruptcy agent responsible for paying claims), the plaintiff must show (1) the benefit should have been given to the plaintiff but was mistakenly given to the defendant, (2) the defendant obtained the benefit from the third party via wrongful conduct, or (3) where plaintiff has a better claim to the benefit than does the defendant. (¶ 67)

Scenario (1) – benefit mistakenly given to defendant – clearly applied here. The bankruptcy court agent paid the landlord’s agent by mistake when the payment should have gone to the plaintiff pursuant to the stipulation.

The court also rejected defendant’s claim that he wasn’t liable under the Illinois LLC Act which immunizes LLC members from company obligations.  805 ILCS 180/10-10.  However, since plaintiff sued the defendant in his individual capacity for his own wrongful conduct (depositing a check in his personal account), the LLC Act didn’t protect the defendant from unjust enrichment liability.

Constructive Trust

The First District then affirmed the trial court’s imposition of a constructive trust on the $640K check.  A constructive trust is an equitable remedy applied to correct unjust enrichment. A constructive trust is generally created where there is fraudulent conduct by a defendant, a breach of fiduciary duty or when duress, coercion or mistake is present. While a defendant’s wrongful conduct is usually required for a court to impose a constructive trust, this isn’t always so. The key inquiry is whether it is unfair to allow a party to retain possession of property – regardless of whether the party has possession based on wrongful conduct or by mistake.

Here, the defendant failed to offer any evidence other than his own affidavit to dispute the fact that he wrongfully deposited funds that should have gone to the plaintiff; the court noting that under Supreme Court Rule 191, self-serving and conclusory affidavits aren’t enough to defeat summary judgment. (¶¶ 75-77)

Take-aways:

This case offers a useful synopsis of two fairly common equitable remedies – unjust enrichment and the constructive trust device – in a complex fact pattern involving multiple parties and diffuse legal proceedings.

The case makes clear that a party will be bound by his attorney’s conduct in signing a stipulation on the party’s behalf and that if a litigant wishes to nullify unauthorized attorney conduct, he carries a heavy burden of proof.

 

 

 

 

Joint Ventures, Close Corporations and Summary Judgment Motion Practice – IL Northern District Case Snapshot

The featured case is Apex Medical Research v. Arif (http://cases.justia.com/federal/district-courts/illinois/ilndce/1:2015cv02458/308072/52/0.pdf?ts=1447939471)

A medical clinical trials firm sued a doctor and his company for breach of contract and some tort claims when the firm learned the doctor was soliciting firm clients in violation of a noncompete signed by him.

In partially granting and denying a flurry of summary judgment motions, the Illinois Northern District highlights the importance of Local Rule 56 statements and responses in summary judgment practice. Substantively, the court provides detailed discussion of the key factors governing whether a business arrangement is a joint venture and what obligations flow from such a finding.

The clinical trials agreement contemplated that plaintiff would locate medical trial opportunities and then provide them to the doctor defendant.  The doctor would then conduct the trials in exchange for a percentage of the revenue generated by them.  The plaintiff sued when the parties’ relationship soured.

Procedurally, the court emphasized the key rules governing Local Rule 56 (“LR 56”) statements and responses in summary judgment practice:

LR 56 is designed to aid the trial court in determining whether a trial is necessary; Its purpose is to identify relevant admissible evidence supporting the material facts.  LR 56 is not a vehicle for factual or legal arguments;

– LR 56 requires the moving party to provide a statement of material facts as to which the moving party contends there is no genuine issue;

– The non-moving party must then file a response to each numbered paragraph of the movant’s statement of facts and if it disagrees with any statement of fact, the non-movant must make specific reference to the affidavits and case record that supports the denial;

– A failure to cite to the record in support of a factual denial may be disregarded by the court;

– The non-movant may also submit its own statement of additional facts that require denial of the summary judgment motion;

– Where a non-movant makes evasive denials or claims insufficient knowledge to answer a moving party’s factual statement, the court will deem the fact admitted.

(**2-3)

The court focused its substantive legal analysis on whether the individual defendant owed fiduciary duties to the plaintiff.  Under Illinois law, a joint venturer owes fiduciary duties of loyalty and good faith to his other joint venturer.  So too does a shareholder in a close corporation (a corporation where stock is held in the hands of only a few people or family members) – but only if that shareholder is able to influence corporate policy and management.

The hallmarks of an Illinois joint venture are: (1) an express or implied association of two or more persons to carry out a single enterprise for profit; (2) a manifested intent by the parties to be joint venturers; (3) a community of interest (i.e. joint contribution of property, money, effort, skill or knowledge); and (4) a measure of joint control and management of the enterprise.  (*16).

The most important joint venture element is the joint control (item (4)) aspect.  Here, there were provisions of the parties’ written contract that reflected equal control and management of the clinical trials arrangement but other contract terms reflected the opposite – that the plaintiff could supervise the doctor defendant.  These conflicts in the evidence showed there was a genuine factual dispute on whether the parties jointly controlled and managed the trial venture.

The evidence was also murky as to whether the doctor defendant had enough control over the corporate plaintiff to subject the doctor to fiduciary obligations as a close corporation shareholder.  The conflicting evidence led the court to deny summary judgment on the plaintiffs’ breach of fiduciary duty claim. (**16-17).

Afterwords:

Procedurally, the case presents a thorough summary of the key rules governing summary judgment practice in Illinois Federal courts.  The party opposing summary judgment must explicitly cite to the case record for its denial of a given stated fact to be recognized by the court.

The case also provides useful substantive law discussion of the key factors governing the existence of a joint venture and whether a close corporation’s shareholder owes fiduciary duties to the other stockholders of that corporation.

 

Rights of First Refusal: Bankruptcy “Infotapes” Titan Wins Michigan Avenue Penthouse Dispute – IL 1st Dist.

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In today’s installment of High Class Problems, I feature Peter Francis Geraci, the Chicago bankruptcy lawyer whose pervasive television presence is doubtlessly familiar to weekday afternoon viewers.  Geraci and his wife recently won their real estate dispute with a company controlled by a foreign investor over rights to a 40th floor penthouse (“Penthouse”) in Chicago’s tony Michigan Avenue (“Magnificent Mile”) shopping district.

Reversing the trial court – who sided with the investor plaintiff- the First District appeals court in First 38, LLC v. NM Project Company, LLC, 2015 IL App (1st) 142680-U, expands on some recurring contract interpretation principles as applied to a high-dollar real estate dispute.

The plaintiff, a company associated with Mexican mining impresario and billionaire German Larrea, held a right of first refusal (“ROFR”) that required the Penthouse seller defendant to notify the plaintiff of any bona fide offer to buy the Penthouse that was accepted by the owner.  The owner was required to provide a copy of the signed offer (with certain identifying information blacked out) to the plaintiff who then had one (1) business day to match the offer.

When the owner sent the offer with the Geracis’ information redacted and failed to provide a copy of the earnest money check (a cool $860K, approx.), the plaintiff sued to block the sale of the Penthouse to the Geracis claiming the owner failed to adhere to the terms of the ROFR.  The Geracis eventually counter-sued for injunctive relief and specific performance and asked the court to require the owner to sell the Penthouse to them.

After a bench trial, the court ruled in plaintiff’s favor and the Geracis appealed.

Reversing, the First District discussed the operative contract law principles that framed the parties’ dispute.

A right of first refusal is a restraint on alienation and is strictly construed against the holder;

– An Illinois court’s primary goal in interpreting a contract is to give effect to the parties’ intent by imputing the plain and ordinary meaning to the contract terms;

– A contract will not be deemed ambiguous just because the parties disagree on its meaning; instead, ambiguity requires words that are reasonably susceptible to more than one meaning;

– When a contract contains an ambiguity, a court may consider evidence of the parties intent (“your honor, this is what we meant….”);

– An “offer” in the context of contract law is a “manifestation of willingness to enter into a bargain made in such a way that another person’s assent to that bargain is invited and will conclude it’;

– An offer must be definite as to its material terms such that the parties are reasonably certain as to what the offer entails;

– A court cannot alter, change or modify terms of a contract or add new ones that the parties didn’t agree to and there is a presumption against provisions that could have easily been included in a contract;

A bona fide offer is one where the purchaser can command the funds necessary to accept an offer.
(¶¶ 47-48, 51-52, 63)

Here, the court found the ROFR’s plain text unambiguous.  It provided that upon defendant notifying the plaintiff of an accepted and bona fide offer, the plaintiff’s ROFR obligations were triggered. (Plaintiff had one day to match the accepted offer.)  By its clear terms, the ROFR did not require the owner defendant to divulge the third-party buyer’s identity nor did it require proof of the third-party’s earnest money deposit.

According to the court, had the parties wished to require more offer specifics, they could have easily done so.  (¶ 54).  As a result, the First District reversed the trial court and held that the owner defendant complied with its ROFR notice requirements.  Since plaintiff failed to match the Geracis’ offer for the Penthouse within one business day of notice, it relinquished its rights to match the offer.

Take-aways:

For such expensive and unique subject matter, the main legal rules relied on by the court are simple.  The court applies basic contract formation and interpretation rules to decipher the ROFR and determine whether the parties adhered to their respective obligations under it.

From a drafting standpoint, the case cautions sophisticated commercial entities to take pains to spell out key contract terms as specifically as possible to avoid future disputes over what the contract says and means.