Archives for March 2017

‘Inquiry Notice’ Element of Discovery Rule Dooms Plaintiff’s Fraud in Inducement Claim – IL First Dist.

The First District recently discussed the reach of the discovery rule in the course of dismissing a plaintiff’s fraud claims on statute of limitations grounds.

The plaintiff in Cox v. Jed Capital, LLC, 2016 IL App (1st) 153397-U, brought a slew of business tort claims when he claimed his former employer understated its value in an earlier buy-out of the plaintiff’s LLC interest.

Plaintiff’s 2007 lawsuit settled a year later and was the culmination of settlement discussions in which the defendants (the former employer’s owner and manager) produced conflicting financial statements.  The plaintiff went forward with the settlement anyway and released the defendants for a $15,000 payment.

In 2014, after reading a Wall Street Journal article that featured his former firm, plaintiff learned the company was possibly worth much more than was previously disclosed to him.  Plaintiff sued in 2015 for fraud in the inducement, breach of fiduciary duty and breach of contract.

The trial court dismissed the claims on the basis they were time-barred by the five-year limitations period and the plaintiff appealed.  He argued that the discovery rule tolled the limitations period and saved his claims since he didn’t learn the full extent of his injuries until he read the 2014 article.

Result: Dismissal of plaintiff’s claims affirmed.

Q: Why?

A: A fraud claim is subject to Illinois’ five-year statute of limitations codified at Section 13-205 of the Code of Civil Procedure.  Since the underlying financial documents were provided to the plaintiff in 2008 and plaintiff sued seven years later in 2015.  As a result, plaintiff’s claim was time-barred unless the discovery rule applies.

In Illinois, the discovery rule stops the limitations period from running until the injured party knows or reasonably should know he has been injured and that his injury was wrongfully caused.

A plaintiff who learns he has suffered from a wrongfully caused injury has a duty to investigate further concerning any cause of action he may have.  The limitations period starts running once a plaintiff is put on “inquiry notice” of his claim.  Inquiry notice means a party knows or reasonably should know both that (a) an injury has occurred and (b) it (the injury) was wrongfully caused.  (¶ 34)

Fraud in the inducement occurs where a defendant makes a false statement, with knowledge of or belief in its falsity, with the intent to induce the plaintiff to act or refrain from acting on the falsity of the statement, plaintiff reasonably relied on the false statement and plaintiff suffered damages from that reliance.

Plaintiff alleged the defendants furnished flawed financial statements to induce plaintiff’s consent to settle an earlier lawsuit for a fraction of what he would have demanded had he known his ex-employer’s true value.  The Court held that since the plaintiff received the conflicting financial reports from defendants in 2008 and waited seven years to sue, his fraud in the inducement claim was untimely and properly dismissed.

Afterwords:

This case paints a vivid portrait of the unforgiving nature of statutes of limitation.  A plaintiff has the burden of establishing that the discovery rule preserves otherwise stale claims.  If a plaintiff is put on inquiry notice that it may have been harmed (or lied to as the plaintiff said here), it has a duty to investigate and file suit as quickly as possible.  Otherwise, a plaintiff risks having the court reject its claims as too late.

‘Domicile’ vs. ‘Residence’ vs. ‘Citizenship’ in Federal Court Jurisdiction – More Semantic Hairsplitting?

Strabala v. Zhang, 318 F.R.D. 81 (Ill. N.D. 2016), featured here for its detailed discussion of e-mail evidence, provides an equally thorough analysis of the differences between residence and domicile in the Federal court jurisdiction calculus.

In the Federal litigation scheme, the party asserting Federal court jurisdiction bears the burden of proving subject matter jurisdiction by a preponderance of the evidence.

The plaintiff here alleged that the Northern District had original jurisdiction based on 28 U.S.C. § 1332(a)(2) – the diversity of citizenship statute that vests Federal courts with jurisdiction over claims between “citizens of a State and citizens or subjects of a foreign state.”

The defendants were unquestionably Chinese citizens – a foreign state under Section 1332.  The plaintiff’s citizenship, though, was unclear.  While plaintiff claimed he was a citizen of Illinois, the defendants disputed this; they pointed to the plaintiff’s home in China as proof that he wasn’t really an Illinois citizen and so was stateless.  A “stateless” citizen can’t invoke Federal court diversity jurisdiction.

Though colloquially used interchangeably, under Federal law, the terms citizenship and residence have important differences.  Citizenship equals domicile, not residence.  The term residence denotes where a person lives while domicile carries both a physical and mental dimension.

Domicile is “the place where that individual has a true, fixed home and principal establishment” and the place where the person intends to eventually return.  A person can have multiple residences but only one domicile.

Objective factors a court considers to determine domicile include “current residence, voting registration and voting practices, location of personal and real property, location of financial accounts, membership in unions and other associations, place of employment, driver’s license and automobile registration, and tax payments.”  But no lone citizenship/domicile factor is conclusive; each case turns on its own facts.

Applying these factors, the Court noted that since plaintiff was based in Illinois from the late 1980s through 2006 (when plaintiff moved first to Houston, TX then to Shanghai), the Court required defendants to show that plaintiff not only currently lived outside of Illinois but also had no intention of returning to Illinois.

The Court credited the plaintiff’s declaration (sworn statement) of intent to keep an Illinois domicile.  Other factors weighing in favor of finding subject matter jurisdiction included (1) plaintiff and his wife never sold there Chicago condominium or removed furniture from it when they moved to Houston in 2006, (2) for several months they lived in corporate housing provided by plaintiff’s Houston employer (an architecture firm), (3) plaintiff’s wife divided her time equally between Chicago and Houston while plaintiff spent about 50% of his time in Shanghai, 40% in Houston and 10% in Chicago.

The plaintiff’s Texas drivers’ license and Houston condo purchase weren’t enough to tilt the citizenship question to the defendants (who, again, argued that the plaintiff wasn’t an Illinois citizen) since the plaintiff swore under oath that he intended to keep an Illinois domicile and defendant had no facts to refute this.

Rejecting the defendants’ argument that plaintiff’s domicile was Shanghai, the Court focused on the following facts: (1) plaintiff lived in a furnished hotel with a lease of one year or less and owned no real property or car in Shanghai, (2) plaintiff’s Chinese work permit had to be renewed annually; and (3) plaintiff’s wife spent six months out of the year in Chicago.

Other pro-Illinois domicile factors cited by the Court included the plaintiff’s testimony (via declaration) that he has had a landline telephone number with a Chicago area code for over two decades and plaintiff’s LinkedIn profile that listed his employment locations as Shanghai, Seoul, and Chicago.

Afterwords:

For Federal subject matter jurisdiction based on diversity of citizenship to attach, the plaintiff must be a citizen of a State (as opposed to a foreign country).  This case provides an exhaustive application of the various factors a court considers when deciding the site of a Federal plaintiff’s domicile in a complex fact pattern and emphasizes the differences between residence and domicile.

 

 

Indirect Evidence of E-mail Authenticity Not Enough in Architect’s Defamation Suit – IL ND (Part I of II)

An Illinois Federal court recently expanded on the reach of some common business torts, the grounds to vacate a default judgment, and the evidentiary vagaries of e-mail.

Strabala v. Zhang, 318 F.R.D. 81 (Ill. N.D. 2016), pits an architect against his former partners in a defamation and tortious interference suit based on accusations of unethical conduct and the diversion of partnership assets to foreign businesses.

The plaintiff alleged that two of the defendants e-mailed different businesses and plaintiff’s professional associates and falsely accused him of forging signatures, illegally using copyrighted software and misrepresenting his accomplishments and “tax fraud.”

After a default judgment entered against them, the former partners moved to vacate the judgment and separately moved to dismiss the plaintiff’s suit for lack of subject matter and personal jurisdiction and defective service of process.  The court vacated the default judgment and partially granted the defendants’ motion to dismiss.  Some highlights of the court’s opinion:

Federal Rules 55 and 60 respectively allows a court to set aside a default order for good cause and a default judgment.  A judgment entered by a court that lacks subject matter jurisdiction over a case or personal jurisdiction over a defendant is void and must be set aside.  See FRCP 60(b)(4).  This furthers the law’s established policy of having cases decided on their merits instead of on technicalities.

A party seeking to vacate an entry of default prior to the entry of final judgment must show: (1) good cause for the default; (2) quick action to correct it; and (3) a meritorious defense to the complaint.  The court found that the defendants satisfied the three-prong standard to vacate the default.

E-mail Evidence: Foundational Rules

The defendants sought to offer two emails into evidence – one sent by the plaintiff, the other received by him.  To lay a foundation for documentary evidence, the proponent (here the defendants) must submit evidence “sufficient to support a finding that the item is what the proponent claims it is.”  FRE 901(a).  The foundational standard is lenient. The proponent must only make a prima facie showing of genuineness; it is up to the court or jury to decide whether the evidence is truly authentic.

Here, the defendants failed to lay a foundation for the e-mails.  First, the plaintiff – variously, author and recipient of the e-mails – testified that he believed the e-mails may have been altered and did not concede the e-mails’ authenticity.

Next, the Court rejected Defendants’ argument that the e-mails were self-authenticating under FRE 902(7) – the rule governing inscriptions, signs, tags, or labels that indicate business origin, ownership, or control.

The court found that plaintiff’s electronic e-mail signature and a company letterhead logo were not “trade inscriptions” within the meaning of Rule 902(7) citing to a Seventh Circuit case holding that a trade inscription on the cover of an owner’s manual does not authenticate the contents of the manual.

Plaintiff presented evidence in his affidavit (declaration) rebutting the presumptive authenticity of the e-mails by calling into question whether he signed one e-mail electronically and by stating that the e-mails were on his personal laptop’s hard drive, a device plaintiff claimed the defendants stole from him.  The court held that if the e-mails did originate from plaintiff’s stolen laptop, the evidence would be inadmissible.

Q: So what kind of evidence would have satisfied the court?

A: Direct proof of authenticity.

Q: What would qualify as “direct proof”?

A: Testimony by Plaintiff or the other sender or someone who witnessed the sending of the emails who could attest that the questioned e-mails are the actual, unchanged emails sent by the authors.

The court noted that indirect evidence of authenticity could also work.  Indirect evidence typically involves testimony from “someone who personally retrieved the e-mail from the computer to which the e-mail was allegedly sent” together with other circumstantial evidence such as the e-mail address in the header and the substance of the email itself.

Here, the court found the defendants’ indirect evidence was too flimsy. It noted that the defendants were interested parties and accused of theft (plaintiff claimed they stole his laptop).  The court also held that the defendants’ self-serving testimony that they didn’t alter the e-mails wasn’t enough to establish their authenticity especially in light of plaintiff’s claims that the defendants stole his laptop and that the e-mails appeared to have been changed.

In the end, the court granted the plaintiff’s motion to strike the two e-mail exhibits to the defendants’ motion to dismiss.

Take-aways:

Given the rampantness of e-mail, this case is instructive for litigators since most cases will involve at least some e-mail evidence.  The case also underscores that while the standard for evidence authenticity is low, it still has some teeth.

Here, the plaintiff’s belief that the emails offered against him were doctored coupled with the fact that the e-mails’ source was stolen property (a laptop), was enough to create a question as to whether the e-mails were authentic.

The next post summarizes the Court’s exhaustive analysis of subject matter and personal jurisdiction under the Illinois long-arm statue and Federal due process standards.