Archives for April 2017

As-Is Language In Sales Literature Defeats Fraud Claim Involving ’67 Corvette (Updated April 2017)

In late March 2017, a Federal court in Illinois granted summary judgment for a luxury car auctioneer in a disgruntled buyer’s lawsuit premised on a claimed fake Corvette.

The Corvette aficionado plaintiff in Pardo v. Mecum Auction, Inc., 2017 WL 1217198 alleged the auction company misrepresented that a cobbled-together 1964 Corvette was a new 1967 Corvette – the vehicle plaintiff thought he was buying.  Plaintiff’s suit sounded in common law fraud and breach of contract.  The Court previously dismissed the fraud suit and later granted summary judgment for the defendant on the plaintiff’s breach of contract claim.

The Court dismissed the fraud suit based on “non-reliance” and “as-is” language in the contract.  Since reliance is a required fraud element, the non-reliance clause preemptively gutted the plaintiff’s fraud count.

Denying the plaintiff’s motion to reconsider, the Court noted that an Illinois fraud claimant cannot allege he relied on a false statement when the same writing provides he’s buying something in as-is condition.  The non-reliance/as-is disclaimer also neutralizes a fraud claim based on oral statements and defeats breach of express and implied warranty claims aimed at misstatements concerning a product.

By attaching the contract which contained the non-reliance language, the plaintiff couldn’t prove his reliance as a matter of law.

The Court found for the defendant on plaintiff’s breach of contract claim.  The plaintiff’s operative Second Amended Complaint alleged the auction company breached a title processing section of the contract: that it failed to timely deliver title to the vehicle to the plaintiff.

The Court sided with the auction company based on basic contract interpretation rules.  All the contract required was that the defendant “process” the title within 14 business days of the sale.  It didn’t saddle the defendant with an obligation to deliver the title to a specific person.  Since the evidence in the record revealed that the defendant did process and transfer the title to a third party within the 14-day time frame, plaintiff could not prove that defendant breached the sales contract.

The plaintiff also couldn’t prove damages – another indispensable breach of contract element.  That is, even if the auction company failed to process the title, the plaintiff didn’t show that it suffered any damages.  The crux of the plaintiff’s lawsuit was that it was sold a car that differed from what was advertised.  Whether the defendant complied with the 14-day title processing requirement had nothing to do with plaintiff’s alleged damages.

Since the plaintiff could not offer evidence to support its breach and damages components of its breach of contract action, the Court granted summary judgment for the defendant.

Lastly, the Court rejected plaintiff’s rescission remedy argument – that the contract should be rescinded for defendant’s fraud and failure to perform.

The Court’s ruling that the defendant performed in accordance with the title processing language defeated plaintiff’s nonperformance argument.  In addition, the Court prior dismissal of the plaintiff’s fraud claim based on the contractual non-reliance language knocked out the rescission-based-on-fraud argument.

 

Afterwords:

Non-reliance or “as is” contract text will make it hard if not impossible to allege fraud in connection with the sale of personal property;

A breach of contract carries the burden of proof on both breach and damages elements.  The failure to prove either one is fatal to a breach of contract claim.

In hindsight, the plaintiff should have premised its breach of contract claim on the defendant’s failure to deliver a car different from what was promoted. This arguably would have given the plaintiff a “hook” to keep its breach of contract suit alive and survive summary judgment.

 

IL Supreme Court Expands on Shareholder Derivative Suits and Standing Doctrine in Att”y Malpractice Suit

Some minority shareholders in an LLC sued their former counsel for legal malpractice alleging the firm failed to file “obvious” breach of fiduciary claims against the LLC’s corporate counsel.

Affirming summary judgment for the defendant law firm in Stevens v. McGuirreWoods, LLP, 2015 IL 118652, the Illinois Supreme Court gives content to the quantum of proof needed to sustain a legal malpractice claim and discusses the type of legal interest that will confer legal standing for a corporate shareholder to sue in his individual capacity.

The plaintiffs’ central claim was that McGuirreWoods (MW) botched the underlying case by not timely suing Sidley Austin, LLP (Sidley) after the LLC’s majority shareholders allegedly looted the company.  Sidley got the underlying case tossed on statute of limitations grounds and because the plaintiffs lacked standing. minority shareholder plaintiffs lacked standing to individually sue Sidley since Sidley’s obligations ran squarely

The trial court in the legal malpractice suit granted summary judgment for MW due to plaintiffs’ lack of standing.  The court held that even if MW had timely sued Sidley, the claim still would have failed because they could not bring claims in their individual capacity when those claims belonged exclusively to the LLC. After the First District appeals court partially reversed on a procedural issue, MW appealed to the Illinois Supreme Court.

Result: Plaintiffs’ lacked standing to assert individual claims against Sidley.  Judgment for MW.

Rules/Reasons:

Some cases describe the legal malpractice suit as a “case-within-a-case.”  This is because the thrust of a legal malpractice claim is that if it wasn’t for an attorney’s negligence in an underlying case, the plaintiff would have won that case and awarded damages.

The legal malpractice plaintiff must prove (1) defendant attorney owed the plaintiff a duty of care arising from the attorney-client relationship, (2) the defendant’s breached that duty, and (3) as a direct and proximate result of the breach, the plaintiff suffered injury.

Injury in the legal malpractice setting means the plaintiff suffered a loss which entitles him to money damages.  Without proof the plaintiff sustained a monetary loss as a result of the lawyer defendant’s negligence, the legal malpractice suit can’t succeed.

The plaintiff must establish that he would have prevailed in the underlying lawsuit had it not been for the lawyer’s negligence.  The plaintiff’s recoverable damages in the legal malpractice case are the damages plaintiff would have recovered in the underlying case. [¶ 12]

Here, the plaintiffs sued Sidley in their individual capacities.  Since Sidley’s obligations flowed strictly to the LLC, the plaintiff’s lacked standing to sue Sidley in their individual capacity.

Under the law, derivative claims belong solely to a corporation on whose behalf the derivative suit is brought.  A plaintiff must have been a shareholder at the time of the transaction of which he complains and must maintain his shareholder status throughout the entire lawsuit.  [¶ 23]

Illinois’ LLC Act codifies this common law derivative suit recovery rule by making clear that any derivative action recovery goes to the LLC.  By contrast, the nominal plaintiff can only recover his attorneys’ fees and expenses.  805 ILCS 180/40-15.

A nominal plaintiff in a derivative suit only benefits indirectly from a successful suit through an increase in share value. The Court held that the plaintiffs’ missing out on increased share value was not something they could sue for individually in a legal malpractice suit.  Had MW timely sued Sidley, any recovery would have gone to the LLC, not to the plaintiffs – even though they were the named plaintiffs.  Since the plaintiffs could not have recovered money damages against Sidley in the earlier lawsuit, they cannot now recover those same damages under the guise of a legal malpractice action.

An added basis for the Court’s decision was that plaintiffs lacked standing to sue by divesting themselves of their LLC interests.  Standing means one has a real interest in the outcome of a controversy and may suffer injury to a legally recognized interest.

Since plaintiffs relinquished their LLC membership interests before suing MW, they lacked standing to pursue derivative claims for the LLC.

Afterwords:

This case illustrates in vivid relief the harsh results flowing from statute of limitations and the standing doctrine as it applies to aggrieved shareholder suits.

The case turned on the nature of the plaintiff’s claims.  Clearly, they were suing derivatively (as opposed to individually) to “champion” the LLC’s rights.  As a result, any recovery in the case against Sidley would flow to the LLC – the entity of which plaintiffs were no longer members.

And while the plaintiffs did maintain their shareholder status for the duration of the underlying Sidley case, their decision to terminate their LLC membership interests before suing MW proved fatal to their legal malpractice claims.

 

Pay-When-Paid Clause in Subcontract Not Condition Precedent to Sub’s Right to Payment – IL Court

Pay-if-paid and pay-when-paid clauses permeate large construction projects

In theory, the clauses protect a contractor from downstream liability where its upstream or hiring party (usually the owner) fails to pay.

Beal Bank Nevada v. Northshore Center THC, LLC, 2016 IL App (1st) 151697 examines the fine-line distinction between PIP and PWP contract terms. a lender sued to foreclose

The plaintiff lender sued to foreclose commercial property and named the general contractor (GC) and subcontractor (Sub) as defendants.  The Sub countersued to foreclose its nearly $800K lien and added a breach of contract claims against the GC.

In its affirmative defense to the Sub’s claim, the GC argued that payment from the owner to the GC was a condition precedent to the GC’s obligation to pay the Sub.  The trial court agreed with the GC and entered summary judgment for the GC.  The Sub appealed.

Result: Reversed.

Reasons:

The Subcontract provided the GC would pay the Sub upon certain events and arguably (it wasn’t clear) required the owner’s payment to the GC as a precondition to the GC paying the Sub.  The GC seized on this owner-to-GC payment language as grist for its condition precedent argument: that if the owner didn’t pay the GC, it (the GC) didn’t have to pay the Sub.

Under the law, a condition precedent is an event that must occur or an act that must be performed by one party to an existing contract before the other party is obligated to perform.  Where a  condition precedent is not satisfied, the parties’ contractual obligations cease.

But conditions precedent are not favored.  Courts will not construe contract language that’s arguably a condition precedent where to do so would result in a forfeiture (a complete denial of compensation to the performing party). (¶ 23)

The appeals court rejected the GC’s condition precedent argument and found the Subcontract had a PWP provision.  For support, the court looked to the contractual text and noted it attached two separate payment obligations to the GC – one was to pay the Sub upon “full, faithful and complete performance,”; the other, to make payment in accordance with Article 5 of the Subcontract which gave the GC a specific amount of time to pay the Sub after the GC received payment from the owner.

The Court reconciled these sections as addressing the amounts and timing of the GC’s payments; not whether the GC had to pay the Sub in the first place. (¶¶ 19-20)

Further support for the Court’s holding that there was no condition precedent to the GC’s obligation to pay the Sub lay in another Subcontract section that spoke to “amounts and times of payments.”  The presence of this language signaled that it wasn’t a question of if the GC had to pay the Sub but, instead, when it paid.

In the end, the Court applied the policy against declaring forfeitures: “[w]ithout clear language indicating the parties’ intent that the Subcontractor would assume the risk of non-payment by the owner, we will not construe the challenged language…..as a condition precedent.” (¶ 23)

Since the Subcontract was devoid of “plain and unambiguous” language sufficient to overcome the presumption against a wholesale denial of compensation, the Court found that the Subcontract contained pay-when-paid language and that there was no condition precedent to the Sub’s entitlement to payment from the GC.

Take-aways

Beal Bank provides a solid synopsis of pay-if-paid and pay-when-paid clauses.  PIPs address whether a general contractor has to pay a subcontractor at all while PWPs speak to the timing of a general’s payment to a sub.

The case also re-emphasizes that Section 21(e) of the Illinois Mechanics Lien Act provides that the presence of a PIP or PWP contract term is no defense to a mechanics lien claim (as opposed to garden-variety breach of contract claim).