Defective Lis Pendens In Wisc. Suit Doesn’t Warrant Contempt Sanctions Against NY Lawyer – Seventh Circuit Says

imageThe Seventh Circuit recently considered the scope of civil contempt of court and the range of permissible sanctions for an out-of-state attorney who misfiles a document that potentially impedes the sale of real estate.

In Trade Well International v. United Central Bank, (http://caselaw.findlaw.com/us-7th-circuit/1691932.html) a New York attorney admitted temporarily in Wisconsin to pursue a Federal case there mistakenly filed a construction lien when he meant to file a lis pendens in a replevin suit seeking the return of furnishings his client provided to a Wisconsin hotel.  The lien clouded the hotel’s title and put a wrench in the defendant’s efforts to sell it to a third party.

As a sanction for the faulty filing, the district judge revoked the lawyer’s pro hac vice status (this allows a lawyer from state to practice temporarily in another), held him in contempt and fined him $500.  The lawyer appealed.

Held: Reversed. The sanction was too harsh.

Q: Why?

A: Under Wisconsin law, a lis pendens must be filed whenever legal relief is sought affecting real property that could confirm or change interests in that property.  The lis pendens must be filed in the register of deeds for the county where the real estate is located.  Fixtures are classified as real property by Wisconsin statute.

When a lis pendens is filed, a subsequent purchaser or lender on the property is bound by the proceedings in the same manner as a party to the lawsuit.

A lis pendens prepared by a member of the Wisconsin Bar doesn’t have to be authenticated. But where a non-member of the Wisconsin Bar prepares it, the lis pendens must be authenticated (sworn to under oath by a public officer of the State).

The purpose of the lis pendens is to give constructive notice to third parties that there is a pending judicial proceeding involving real estate.  A  lis pendens differs from a construction lien in that (unlike the construction lien) it doesn’t create a lien on real property.

Here, the attorney’s lis pendens was facially deficient since it referenced Wisc’s construction lien statute and it wasn’t properly authenticated.

The court then discussed the applicable contempt of court nomenclature.  A contempt sanction is civil if it is “remedial” but criminal if “punitive.” Where a litigant or lawyer is punished for out-of-court conduct, the contempt is “indirect.” For criminal contempt, the court must give notice to the party that it is being charged (with criminal contempt) and must ask the government to prosecute the contempt.

Before holding someone in civil contempt, the court must specify what “unequivocal” court order or command was violated by the person being sanctioned.  An order of contempt is immediately appealable.

Reversing the district court’s contempt finding, the Seventh Circuit held it was unclear whether the contempt finding was criminal or civil since the trial judge didn’t specify in the order.

The record also showed that the attorney was at most negligent: he mistakenly recorded a lis pendens that referenced (but shouldn’t have) Wisconsin’s construction lien statute. The Seventh Circuit stressed that negligence or hasty drafting isn’t enough to support a finding of bad faith under the law.

Since the district court couldn’t articulate the basis for its contempt finding against the NY attorney and because there was no evidence of intentional conduct by him, the contempt sanctions were improper and the contempt order was vacated.

Take-aways:

1/ Out-of-state counsel must familiarize himself with applicable law in the jurisdiction he’s temporarily admitted to practice in and should probably retain local counsel to assist who is more versed in the specifics of the forum/foreign jurisdiction;

2/ A contempt order must specify whether it’s civil or criminal and must explicitly reference the court order that was violated;

3/ Criminal contempt has a due process component: the sanctioned party must be given notice and an opportunity to be heard and the government must prosecute the formal civil contempt proceeding.

Unjust Enrichment – For When the Handshake Deal Goes Bad

An imploded business arrangement for importing and then selling Christmas decorations sets the stage for the Northern District’s (IL) analysis of a slew of signature commercial litigation issues in Sunny Handicraft, Inc. v. Envision This!, LLC, 2015 WL 231108. 

While the case only involves a ruling on a 12(b)(6) pleadings motion, it’s still post-worthy for its discussion of some important and recurring issues that arise in breach of contract lawsuits.

The plaintiff ornament maker entered into an agreement with defendants – a buyer (“Buyer”) and end-retailer (“Retailer”) of the decorations, respectively – for about $3.5M worth of Christmas-themed merchandise. Plaintiff sued when the defendants failed to pay.

The Buyer, for its part, counter-sued the plaintiff to recoup unpaid advertising costs and miscellaneous shipping charges. The Retailer moved to dismiss several complaint counts and the plaintiff moved to dismiss the purchaser defendant’s counterclaims.

Granting the Retailer’s motion to dismiss the unjust enrichment count, the court pronounced that unjust enrichment  is a ‘quasi-contract’ theory where a court implies a contract in order to prevent unjust results. 

An unjust enrichment plaintiff must allege that defendant has unjustly retained a benefit to the plaintiff’s detriment and that retention violates fundamental principles of equity, justice and good conscience.

But a party can’t claim unjust enrichment where an express contract governs the parties’ relationship. A plaintiff can, however, plead unjust enrichment as an alternative theory to a breach of contract claim as long as the plaintiff doesn’t incorporate the express contract allegations into its unjust enrichment ones.

Generally, a court will not impose unjust enrichment liability against a third party that receives a benefit from the plaintiff’s agreement with another party. So, if x and y have a contract, x normally won’t be able to sue z just because z happens to benefit from x’s services. 

The only time a third party can be liable for unjust enrichment is where the plaintiff can show that the plaintiff had a reasonable expectation of being paid by the third party. *4.

The court granted the Retailer’s motion to dismiss the plaintiff’s unjust enrichment claim and denied the plaintiff’s motion to dismiss the Buyer’s unjust enrichment counterclaim.  On the former claim, the plaintiff failed to allege any conduct by the Seller that would lead plaintiff to have a reasonable expectation of being paid by the Seller.

Plaintiff’s conclusory allegation that the Retailer “was aware” that Plaintiff expected payment was too bare to survive dismissal.  The plaintiff was required to plead specific conduct by the Retailer that could lead plaintiff to reasonably expect payment.

The court did allow the Buyer’s unjust enrichment counterclaim to proceed.  The Buyer pled unjust enrichment in the alternative to its breach of contract count and alleged that it conferred a measurable benefit – marketing services and paid shipping expenses – on the plaintiff and that the plaintiff’s retention of the Buyer’s services without paying for them was unfair.

Afterwords:

– Unjust enrichment is viable alternative claim even where there is an express contract that governs;

– A plaintiff can implicate a third party in an unjust enrichment case where he can offer evidence or plead facts that demonstrate the plaintiff had a reasonable expectation of being paid by the third party.

No Punitive Damages For Breach of Contract; Conversion of ‘Intangible’ Property = An Open Question – IL ND

Sometimes in breach of contract suits, I see clients (and attorneys, too!) let visceral considerations cloud their judgment.  They let emotions factor into a litigation equation that should purely be about “dollars and cents.”  What’s to an objective observer a simple monetary dispute, becomes a complex psychological event when a breach of contract plaintiff views the defendant’s breach as a personal affront – one calling out for revenge.  Usually though, a breaching defendant isn’t trying to make the plaintiff’s life miserable.  Instead, the defendant typically can’t meet his financial obligations under the agreement or he lets his performance lapse for purely strategic reasons. 

One way the law puts a check on emotions dominating a business dispute is by preventing plaintiffs from bootstrapping a breach of contract claim into a fraud claim.  Another way is through the firmly entrenched legal principle that punitive damages cannot be recovered for a breach of contract.

The latter rule is at play in David Mizer Enterprises, Inc. v. Nexstar Broadcasting, Inc., 2015 WL 469423 (N.D.Ill. 2015), where a business consultant sued a television broadcasting firm under various legal and equitable theories for wrongfully disclosing plaintiff’s proprietary software and business model to third parties in violation of a written licensing agreement.

The plaintiff alleged that after a three-year license period expired, defendant continued using plaintiff’s secret software and business model without permission.

The plaintiff sought over $330K in damages in its breach of contract suit and sought an award of punitive damages premised on the defendant’s bad faith.  The plaintiff also joined a conversion count based on the defendant’s unauthorized use of plaintiff’s software after the license lapsed.  Defendant moved to dismiss and to strike plaintiff’s punitive damages allegation.

Result: motion to dismiss denied; motion to strike punitive damages claim granted

Reasons:

Under Illinois law, punitive damages are generally not available for a breach of contract.  An exception to this rule applies where the contract breach amounts to an independent tort is done with “malice, wantonness or oppression.”  The court looks to a defendant’s motive for its breach in determining whether punitive damages are warranted.

The court struck the plaintiff’s punitive damages claim.  The plaintiff failed to allege malice or bad faith conduct by the defendant.  Instead, plaintiff’s allegations were consonant with a basic breach of contract action.  As a result, punitive damages weren’t warranted.

Next, the court sustained the plaintiff’s conversion claim. Under Illinois law, a conversion plaintiff must establish that he (1) has a right to certain property; (2) has an absolute and unconditional right to the immediate possession of the property; (3) made a demand for possession; and (4) the defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.

Typically, conversion must involve tangible, personal property like computer hardware or a car, for example.  Whether conversion applies to intangible property is an open question with cases going each way.

The defendant argued that plaintiff was suing to recover damages based on defendant’s interference with its intangible electronic data.  Rejecting this argument, the court found that since the licensing contract specifically mentioned plaintiff’s software and related writings, the lifted property was tangible enough to underpin a conversion claim.

The court held that the plaintiff’s allegation that the defendant deprived Plaintiff of the exclusive benefit of its software and information, stated a valid conversion claim sufficient to survive a motion to dismiss.

Take-aways:

Punitive damages aren’t recoverable in breach of contract suits.  The only exception is where the plaintiff can show the defendant’s breach was done with malice: for the sole purpose of harming the plaintiff;

Whether intangible property (like computer data) can underlie a conversion action is an open question.  The more “hard” or concrete property the plaintiff can point to, the better his chances of making out a civil conversion suit.