‘Closely Intertwined’ Business Relationship Equals Possible Joint Venture – Says Illinois Court

Consider this: a multi-national plastics seller (“Seller”) has a written contract with a plastics manufacturer (the “Manufacturer”) that labels the Manufacturer as an independent contractor of the Seller.  Under the agreement, the Seller supplies material to the Manufacturer who then makes plastic products exclusively for the Seller and sells the products back to the Seller.  The Seller buys the finished products from the Manufacturer at a pre-set price and then sells them to its (Seller’s) own customers.  The Seller and Manufacturer do not share any profits on Seller’s product sales.

An employee of the Manufacturer then gets injured on the job and sues both the Seller and Manufacturer for damages claiming they are joint venturers and therefore equally responsible for his injuries.  This is a significant event given the size and financial resources of the Seller.

Question: does this claim possibly have legs?

Answer: “Maybe.”  The First District held that the question of whether there is a joint venture between Seller and Manufacturer was open enough to survive summary judgment.

The plaintiff in Hyatt v. Western Plastics, 2014 IL App (2d) 140178, suffered severe injuries when his arms got caught in an extruding machine. He sued his employer – the “Manufacturer” in the above snippet – along with the Seller on the theory that there was a joint venture between the Manufacturer and Seller.  The trial court entered summary judgment for the Seller.  The plaintiff appealed.

Reversing the trial court, the First District engaged in a detailed analysis of some Illinois business structure basics:

– A joint venture is an association of two or more persons to carry on a single enterprise for profit;

– Joint venture members  owe fiduciary duties to one another and are vicariously liable for negligent acts of the other joint venturers carried out in the course of the enterprise;

– No formal agreement is necessary to form a joint venture and it can be inferred from the parties’ conduct and surrounding circumstances;

– Joint venture is a creature of contract law; not a statute and depends on the parties’ intent;

– Cardinal joint venture traits include (1) a community of interest – manifested by the joint contribution of money, property, effort, skill or knowledge; (2) an express or implied agreement to carry on an enterprise; (3) a sharing of profits; and (4) joint control and management of the enterprise;

(¶¶ 72-77)

Synthesizing the case’s thick discovery record, the court found there was a disputed question of fact on whether the parties formed a joint venture.

Some of the evidence pieces that was key to the court’s summary judgment reversal included:

(1) The Manufacturer-Seller contract was nearly thirty years’ old (automatically renewing every year) and required the Manufacturer to make some 800,000 pounds of plastic products annually and to sell them exclusively to the Seller at a pre-set formula.;

(2) Exclusivity: the contract prevented the Manufacturer from selling the plastic product to anyone other than Seller and gave Seller the final say over any product or process changes;

(3) A “Cost Improvement” section of the contract provided that Seller and Manufacturer would share the benefits of cost improvements on a 50/50 basis;

(4) Multiple emails revealed that Seller’s and Manufacturer’s personnel discussed a mutually beneficial business relationship and alluded to long-term collaboration and cost savings sharing.

(¶¶ 80-101)

In the end, the Court really didn’t know what to make of the parties’ plastics making arrangement.  The most it could say was that it was  a “long-term, closely intertwined relationship.” (¶ 101).

Taken together, the evidence of the parties’ unique business model raised a material fact question (as to whether it was a joint venture) that should have survived summary judgment.

Afterwords:

Definitely a pro-plaintiff case in the sense that a company that’s arguably twice removed from an injured plaintiff and who sells to a universe of consumers unrelated to those the plaintiff’s employer sells to can still be deemed a joint venturer of that employer.

The case could have huge liability ramifications.  If a deep-pocketed seller can be viewed as being in a joint venture with a separate manufacturer, that seller is potentially on the hook for a high dollar jury verdict or settlement for actions of the manufacturer alone.

The case lesson for business defendants is clear: If the intent is to be considered separate and independent, they should document that and take pains not to jointly control business property or share in its profits.

 

Amended Complaints and Quantum Meruit – Some Illinois Reminders

Earlier (http://paulporvaznik.com/quantum-meruit-basics-illinois-law/1367) I discussed how quantum meruit is a valuable fallback or “Plan B” theory of recovery when a client has done work for someone, hasn’t been paid and there is no governing express contract between them.  Quantum meruit (translation: “as much as he deserves”) ensures that my client at least gets something where his  services have benefitted a defendant who welcomed the services or stood silently as my client performed them.

Blietz v. System Integration, 2014 IL App (1st) 132270-U examines the pleading elements of quantum meruit and the importance of assigning a monetary value to the services that form the basis for the quantum meruit suit.

There, the Plaintiff sued his former employer – an architecture firm – to recover about $300K in unpaid compensation for accounting and marketing services the plaintiff rendered for the firm.  He brought claims for breach of contract, a statutory wage payment and collection act claim and an alternative quantum meruit action.

The trial court dismissed the claims for lack of factual specifics and the architect appealed.

Held: Affirmed

Q: Why:

A: The appeals court affirmed dismissal of the plaintiff’s breach of contract and wage payment claim on purely procedural grounds.  When a plaintiff files an amended complaint, he waives objections to the court’s ruling on prior complaints.  Where an amendment is complete in itself and doesn’t refer to or adopt the prior pleading, the prior pleading ceases to be part of the record and it’s viewed as abandoned.  A party only needs to reference an earlier pleading in a footnote or a single paragraph to preserve it for appellate review.

Here, by failing to adopt or reference his breach of contract and wage count claims in his most recent pleading, these claims were abandoned and unappealable.

The court also affirmed plaintiff’s quantum meruit dismissal.  To recover in quantum meruit, the plaintiff must plead (1) he performed services, (2) that benefitted a defendant, (3) that it’s unjust for the defendant to reap the benefits of the plaintiff’s services without paying the plaintiff. 

The quantum meruit plaintiff has the burden to show the defendant received the plaintiff’s services and that it would be unjust for the defendant to retain the services without paying for them.  Critically, the plaintiff must prove his services were of “measurable benefit” to the defendant.  (¶25).

The plaintiff’s quantum meruit claim failed on its face.  The plaintiff didn’t monetize the value of his unpaid work but did say he was paid over $96K during his tenure with the defendant.  By doing so, plaintiff had to plead that he performed work that had a value over and above the $96K paid to him.  Because the plaintiff couldn’t plead work that exceeded the $96K paid him, he failed to allege that he conferred a measurable benefit on the defendant.

Plaintiff’s bare allegations that he “created value” for defendant and “greatly increased” the defendant’s company value during plaintiff’s tenure were too nebulous to survive a motion to dismiss.  Under Illinois fact-pleading rules, these bare bones allegations with no factual support didn’t provide a calculable amount of the claimed services.  As a result, plaintiff’s quantum meruit claim failed.  (¶ 29).

Afterwords:

A.  To preserve your right to appeal a dismissed count, you should reference it in the amended pleading – otherwise the count is abandoned and can’t be appealed;

B.  Quantum meruit only applies where there is no express contract or a contract formation defect (e.g. uncertain price term, duration, etc) that makes a basic breach of contract claim impossible;

B.  The quantum meruit plaintiff must do more than nakedly plead that he performed services that benefitted a defendant.  He must instead allege he provided quantifiable value to the defendant and also plead surrounding facts that show it’s unfair for the defendant to enjoy the fruits of the plaintiff’s services without paying him.

 

 

Statute Of Frauds Doesn’t Prevent Guaranty Claim Where Main Purpose Is To Benefit Guarantor- IL First Dist.

66381928 Photo credit: www.template.net (1.21.15)

 

I’m surprised at how often I see contracts where it’s unclear whom the parties are.  Sometimes, a contract’s main text will say it’s between two companies but it’s clearly signed by two individuals. I’ve also experienced the reverse: the contract body says it’s between two individuals but the signature block provides that it’s signed by corporate agents on behalf of their corporate employers.  When the contract is breached, it becomes a challenge to sort out who’s entitled to sue and who should be named as defendant.

Sullivan & Crouth Holdings, LLC v. Ceko, 2014 IL App (1st) 133028-U examines the impact of conflicting language in a promissory note and how textual contradictions affect the note’s enforceability.

Plaintiff sued the guarantor defendant for breach of a $100K promissory note (“Note”). The Note was between an LLC borrower and a lender but the Note body provided that the individual defendant (the LLC’s manager) will personally guarantee payment of the Note.

The Note signature line read:

 “MGT Lottery, LLC”

 By: [Peter Ceko]

 Peter Ceko, One of Its Managers

The defendant moved for summary judgment on the basis that he signed the Note purely in his capacity as LLC manager – as reflected by the “one of its managers” notation in the signature line.  He also argued that plaintiff’s claim was barred by the Statute of Frauds, 740 ILCS 80/1 (“SOF”) provisions that require a writing to enforce a promise to pay another’s debt (example: a guaranty).  The trial court agreed and entered summary judgment for the defendant and the plaintiff appealed.

Held: Reversed.

Q: Why?

A: There was a facial inconsistency between the Note and its signature line. The Note clearly reflected the intent for the defendant to personally guaranty the LLC borrower obligations yet the defendant clearly signed the Note as LLC manager.

In Illinois, where language in the body of a contract clashes with the apparent representation by the officer’s signature, it’s  an issue of fact for a jury or judge to decide.

The court found that based on its conflicting language, the Note was ambiguous – it was reasonably subject to differing interpretations.  The murky Note, then, required the parties to submit additional evidence of their intent.

The Court also found there was a question of fact as to whether the SOF defeated the plaintiff’s claim.  The SOF requires the promise to pay the debt of another to be in writing.  An exception to this rule is where the “main purpose” or “leading object” of the promisor is to advance his own business interest.  Whether a promisor’s main purpose is to further his personal interest (as opposed to benefit the promisee) is a fact question that defeats summary judgment. 

The court found the record too sparse to discern the LLC manager’s main reason for signing the Note.  As a result, more evidence was needed and summary judgment was improper.

Afterwords:

– Parties to a contract should take pains to specify whether it’s a corporate or individual obligation;

– Where there is a clash between the body of a written contract and its signature block, this will likely signal a fact question that defeats summary judgment;

– The requirement that a promise to pay a third party’s debt be in writing can be tempered where the promisor is signing a contract to advance his own economic interest. 

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