Archives for May 2016

Seventh Circuit Jettisons Software Firm’s Computer Fraud Case – No Damages Evidence

Earlier this year, the Seventh Circuit affirmed summary judgment for a real estate analytics company sued by a software firm who claimed the company was pilfering on-line land records.

The plaintiff in Fidlar Technologies v. LPS Real Estate Data Solutions, 810 F.3d 1075 (7th Cir. 2016) developed a software program called “Laredo” that computerized real estate records and made them available to viewers for a fee.  The plaintiff sued when it found out that the defendant was using a web harvester to bypass plaintiff’s software controls and capture the electronic records.  The defendant’s harvester allowed it to disguise the amount of time it was spending on-line and so avoid paying print fees associated with the electronic data. 

The Computer Fraud And Abuse Act (CFAA) Claim

The Court found the was a lack of evidence to support plaintiff’s Computer Fraud and Abuse Act (CFAA) claim as plaintiff could not show the defendant’s “intent to defraud” or “damage” under the CFAA. See CFAA, 18 U.S.C. s. 1030.

CFAA: Intent to Defraud (18 U.S.C. s. 1030(a)(4)

The CFAA defines an intent to defraud as acting “willfully and with specific intent to deceive or cheat, usually for the purpose of getting financial gain for one’s self or causing financial loss to another.” An intent to defraud can be shown by circumstantial evidence since direct intent evidence is typically unavailable.

The Court credited the defendant’s sworn testimony that printing real estate records was a minor part of its business and that it did pay maximum monthly access fees for computerized real estate data.  

The defendant also produced evidence that it used its harvester not only in fee-charging counties, but also in those that didn’t charge at all.  This bolstered its argument that the harvester’s fee-avoidance was an unintended consequence of the defendant’s program.

Finally, the Court noted that defendant’s agreements with the various county offices (which made the real estate data available) didn’t expressly prohibit the use of a web harvester. These factors all weighed against finding intentional conduct under the CFAA by the defendant analytics company.

CFAA: Transmission and Damage Claim (18 U.S.C. s. 1030(a)(5)(a)

The Seventh Circuit also rejected the plaintiff’s CFAA transmission claim; echoing the District Court’s cramped construction of the CFAA.  The Court described the CFAA’s aim as punishing those who access computers in order to delete, destroy, or disable information.

“Damage” is defined in the CFAA as “any impairment to the integrity or availability of data, a program, a system or information….” 1030(e)(8). The Court interpreted this as destructive behavior aimed at injuring physical computer equipment or its stored data. Examples of this type of damaging conduct includes using a virus or deleting data.  Flooding an email account with data could also qualify as CFAA damage according to at least one case cited by the court. 

Here, the defendant’s conduct didn’t impair the integrity of any computer hardware or compromise any real estate data. The defendant’s attempt to bypass on-line printing access and print fees is not the type of damage envisioned by the CFAA.  According to the Court, mere copying of computer data doesn’t fit the CFAA’s damage definition.  18 U.S.C. § 1030(e)(8).

Afterwords:

Fidlar represents a court narrowly applying the CFAA so that it doesn’t cover the type of economic loss (e.g. subscription fees, etc.) claimed here by the plaintiff.  The case also illustrates that a successful CFAA claimant must show its computer equipment was physically harmed or its data destroyed.  Otherwise, a plaintiff will have to choose a non-CFAA remedy such as a breach of contract, trespass to chattels or trade secrets violation.

 

Faulty Service on Defunct LLC Spells Trouble for Judgment Creditor – IL 1st Dist.

In a case whose procedural progression spans more than a decade, the First District in John Isfan Construction v. Longwood Towers, LLC, 2016 IL App (1st) 143211 examines the litigation aftershocks flowing from a failure to properly serve a limited liability company (LLC).

The case also illustrates when a money judgment can be vacated under the “substantial justice” standard governing non-final judgments.

The tortured case chronology went like this:

2003 – plaintiff files a mechanics lien suit against LLC for unpaid construction work on an 80-unit condominium development;

2005 – LLC dissolves involuntarily;

2005 – lien suit voluntarily dismissed;

2006 – plaintiff breach of contract action filed against LLC;

2009 – default judgment entered against LLC for about $800K;

2011 – plaintiff issues citations to discover assets to LLC’s former members and files complaint against the members to hold them liable for the 2009 default judgment (on the theory that the LLC made unlawful distributions to the members);

2014 – LLC members move to vacate the 2009 judgment. Motion is denied by the trial court and LLC members appeal.

Holding: The appeals court reversed the trial court and found that the 2009 default judgment was void.

The reason: Plaintiff’s failure to properly serve the defunct LLC under Illinois law. As a result, a hefty money judgment was vacated.

Q:           Why?

A:            A defendant must be served with process for a court to exercise personal jurisdiction over him.  A judgment entered against a party who is not properly served is void.  

Section 50 of the LLC Act (805 ILCS 180/1-50) provides that service of process on an LLC defendant must be made on (a) the LLC’s registered agent or (b) the Secretary of State if the LLC doesn’t appoint a registered agent or where the LLC’s registered agent cannot be found at the LLC’s registered office or principal place of business.

In the context of a dissolved LLC, the LLC Act provides that an LLC continues post-dissolution solely for the purpose of winding up.  This is in contrast to the corporate survival statute that provides that a dissolved (non-LLC) corporation continues for five years after dissolution (This means the defunct corporation can be sued and served for up to five years after dissolution.)  805 ILCS 5/5.05.

Here, the plaintiff sued the LLC’s former registered agent over a year after the LLC dissolved.  This was improper service under the LLC Act.  By failing to serve the Secretary of State in accordance with the LLC Act, the court lacked jurisdiction over the LLC.  (¶¶ 37-40)

The Court also rejected the plaintiff’s argument that the erstwhile LLC members waived their objection to jurisdiction over the LLC by participating in post-judgment proceedings.

Since a party who submits to a court’s jurisdiction does so only prospectively, not retroactively, the party’s appearance doesn’t activate an earlier order entered in the case before the appearance was filed. (¶¶ 40-42)

Another reason the Court voided the default judgment was the “substantial justice” standard which governs whether a court will vacate a judgment under Code Section 2-1301(e). 

The reason Section 2-1301 applied instead of the harsher 2-1401 was because the judgment wasn’t final.  It wasn’t final because at the time the judgment was entered, the plaintiff had a pending claim against another party that wasn’t disposed of.  ((¶¶ 46-47)

Under Illinois law, a default judgment is a drastic remedy and Illinois courts have a long and strong policy of deciding cases on the merits instead of on procedural grounds.  In addition, when seeking to vacate a non-final default order, the movant does not have to show a meritorious defense or diligence in presenting the defense.

Applying these default order guideposts, the Court found that substantial justice considerations dictated that the default judgment be vacated.  Even though the judgment was entered some five years before the motion to vacate was filed, it wasn’t a final order. 

This meant the LLC member movants did not have to show diligence in defending the action or a meritorious defense.  All the members had to demonstrate was that it was fair and just that they have their day in court and that they should be able to defend the plaintiff’s unlawful transfers allegations. (¶¶ 49, 51)

Afterwords: This case provides a useful summary of the key rules that govern how to serve LLC’s and particularly, dissolved LLC’s.  The case’s “cautionary tales” are to (i) serve corporate defendants in accordance with statutory direction; and (ii) always request a finding of finality for default judgments where there are multiple parties or claims involved.

Had the plaintiff received a finding of finality, the LLC members’ motion to vacate would have been untimely under Section 2-1401 – which requires a motion to attack a final judgment to be brought within two years and has a heavier proof burden than a 2-1301 motion.  Still, it wouldn’t have mattered here. The plaintiff’s failure to properly serve the LLC meant the judgment was void and could have been attacked at any time.

 

Paralegal Fees Can Be Tacked On to Attorney Fees Sanctions Award – IL First Dist.

Aside from its trenchant discussion of the constructive fraud rule in mechanics lien litigation, the Illinois First District in Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666 clarified that a paralegal’s time and services can be added to a claim for attorneys’ fees as a sanction against a losing party who files false pleadings.

In an earlier post, I discussed how the lien claimant in this case lost its lien foreclosure suit for misstating the completion of work date and inflating the monetary value of work and materials it affixed to the subject site.  The property owner and a lender defendant filed a fee petition and sanctions motion, respectively.

Examining the lender’s motion for Rule 137 sanctions, the Court stated some black-letter rules that govern fee petitions:

  • Under Rule 137, a party can recover attorneys’ fees incurred as a result of a sanctionable pleading or paper (one filed without an objectively reasonable legal basis);
  • Typically, “overhead” expenses aren’t compensable in a fee motion.  The theory is that overhead costs are already built into an attorneys’ hourly rate;
  •   Overhead includes telephone charges, in-house delivery charges, photocopying, check processing, and in-house paralegal and secretarial services;
  • However, when a paralegal performs a specialized legal task that would normally be performed by an attorney, the paralegal’s fees are recoverable since those services would not be considered overhead.

The Court found that the lender’s paralegals performed myriad services that would normally be done by an attorney – namely, researching the title history of the subject property and preparing a memorandum summarizing the title history.  By contrast, a paralegal’s general administrative tasks were disallowed by the court and could not be sought in the sanctions motion.

Afterwords:

When preparing a fee petition, the prevailing party should also include paralegal time and services; especially if they involve researching real estate land records and summarizing a title history.  While the line separating legal services (which are recoverable) and administrative or overhead expenses (which aren’t) is blurry, Father & Sons stands for the proposition that a fee petition or Rule 137 sanctions motion can be augmented by paralegal fees where the paralegal performs specialized work that contains an element of legal analysis.