Illinois Agency, Ratification and Alter-Ego Basics: Case Snapshot

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Several recurring commercial litigation issues are examined in Saletech, LLC v. East Balt, Inc., 2014 IL App (1st) 132639, a case that chronicles a dispute over a written distribution agreement for the sale of bakery products.

The plaintiff entered into the agreement with a Ukranian subsidiary  of various U.S. companies.  The plaintiff sued these U.S. defendants, claiming they were bound by the foreign subsidiary’s breach, that they were alter egos of the subsidiary, or at least ratified the subsidiaries’ conduct.  The trial court granted the U.S. companies’ motion to dismiss for failure to state a cause of action on all counts and the plaintiff appealed.

Held: Affirmed.

Rules/Reasons: Finding for the defendants, the court applied black-letter agency law, ratification and corporate liability rules.

Agency Law and Ratification

– agency is a fiduciary relationship where a principal has the right to control the agent’s conduct and the agent has the power to act on the principal’s behalf;

– an agent’s authority can be actual or apparent.   Actual authority can be (a) express or (b) implied and means that the principal has explicitly granted the agent authority to perform a certain act;

apparent authority arises where (a) the principal holds the agent out as having authority to act on the principal’s behalf and (b) a reasonably prudent person would assume the agent has authority to act in light of the principal’s conduct;

– to show apparent agency, the plaintiff must prove (1) a principal’s consent or knowing acquiescence in the agent’s exercise of authority; (2) the third party’s good-faith belief that the agent possessed such authority; and (3) the third party’s detrimental reliance on the agent’s authority;

– apparent agency must be based on conduct of the principal; not the agent;

ratification applies where a principal manifests an intent to be bound by an agent’s unauthorized act, after the fact;

– ratification can be shown mainly by a principal retaining the benefits of the unauthorized act.

¶¶ 14-15, 21

Here, the Court found the plaintiff failed to establish that the foreign subsidiary (who signed the contract) was the agent for the solvent U.S. defendants.  The plaintiff made only naked allegations of a principal-agent relationship between the domestic and foreign entities.

Without allegations that the defendants knew of the subsidiaries’ distributor agreement or that they held out the foreign firm as having actual or apparent authority to bind the defendants, the plaintiff’s agency allegations were too conclusory to survive a motion to dismiss under Illinois fact-pleading rules.

The plaintiff also failed to plead facts to show the defendants ratified any unauthorized conduct of the foreign company.  For example, plaintiff didn’t allege that the defendants accepted benefits from the distributorship contract after plaintiff alerted defendants to the foreign firm’s misconduct.

Alter-Ego

The plaintiff’s alter-ego allegations were also lacking. The plaintiff claimed that the signing foreign company was an alter-ego of the U.S. companies.

The alter ego doctrine affixes liability to a dominant person (or company) that uses a sham entity as a front or “conduit” in order to avoid contractual liability.  An alter ego plaintiff must make a “substantial showing” that one corporation is a dummy or “front” for another.

In breach of contract cases, the required showing for alter ego (piercing) liability is even more stringent than in tort cases.  This is because a party to a contract presumably entered into the contract with another company voluntarily and is presumed to suffer the consequences if the counterpart breaches and has no collectable assets. ¶ 25

The court found that here, the plaintiff failed to plead sufficient facts to demonstrate a unity of interest between the foreign company and the U.S.-based defendants that would permit the court to impute liability to the U.S. defendants.

Additionally, the plaintiff’s bare allegation that the defendants were “commingling funds” in order to defraud creditors lacked factual support and wasn’t enough to state a breach of contract claim predicated on an alter ego theory. ¶¶ 17-18, 22, 29.

Afterwords:

(1) Illinois fact-pleading rules require more than bare parroting elements of a cause of action to survive a motion to dismiss;

(2) Ratification only applies where plaintiff can plead facts showing a principal retained benefits of an improper agent transaction;

(3) Piercing the corporate veil based on alter ego allegations is difficult to prove; especially in breach of contract setting.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.