Business Lender States Fraud Claim Versus Corporation But Not Civil Conspiracy One in Loan Default Case – IL 1st Dist.

When a corporate defendant and its key officers allegedly made a slew of verbal and written misstatements concerning the corporation’s financial health to encourage a business loan, the plaintiff lender filed fraud and civil conspiracy claims against various defendants.  Ickert v. Cougar Package Designers, Inc., 2017 IL App (1st) 151975-U examines the level of specificity required of fraud and conspiracy plaintiffs under Illinois pleading rules.

The plaintiff alleged that corporate officers falsely inflated both the company’s current assets and others in the pipeline to induce plaintiff’s $200,000 loan to the company.  When the company failed to repay the loan, the plaintiff brought fraud and conspiracy claims – the latter based on the theory that the corporate agents conspired to lie about the company’s financial status to entice plaintiff’s loan.

The trial court granted the defendants’ motion to dismiss the fraud and conspiracy claims and the plaintiff appealed.

Partially reversing the trial court, the First District first focused on the pleading elements of common law fraud and the Illinois Code provision (735 ILCS 5/2-606) that requires operative papers to be attached to pleadings that are based on those papers.

Code Section 2-606 states that if a claim or defense is based on a written instrument, a copy of the writing must be attached to the pleading as an exhibit.  However, not every relevant document that a party seeks to introduce as an exhibit at trial must be attached to a pleading.

Here, while part of plaintiff’s fraud claim was predicated on a faulty written financial disclosure document, much of the claim centered on the defendants’ verbal misrepresentations.  As a consequence, the Court found that the plaintiff wasn’t required to attach the written financial disclosure to its complaint.

Sustaining the plaintiff’s fraud count against the corporate officer defendants (and reversing the trial court), the Court noted recited Illinois’ familiar fraud pleading elements: (1) a false statement of material fact, (2) knowledge or belief that the statement was false, (3) an intention to induce the plaintiff to act, (4) reasonable reliance on the truth of the challenged statement, and (5) damage to the plaintiff resulting from the reliance.

While silence normally won’t equal fraud, when silence is accompanied by deceptive conduct or suppression of a material fact, this is active concealment and the party concealing given facts is then under a duty to speak.

Fraud requires acute pleading specificity: the plaintiff must allege the who, what, where, and when of the misrepresentation.  Since the plaintiff pled the specific dates and content of various false statements, the plaintiff sufficiently alleged fraud against the corporate officers.

(¶¶ 22-26)

A valid civil conspiracy claim requires the plaintiff to allege (1) an agreement by two or more persons or entities to accomplish by concerted action either an unlawful purpose or a lawful purpose by unlawful means; (2) a tortious act committed in furtherance of that agreement; and (3) an injury caused by the defendant.  The agreement is the central conspiracy element.  The plaintiff must show more than a defendant had “mere knowledge” of fraudulent or illegal actions.  Without a specific agreement to take illegal actions, the conspiracy claim falls.

In the corporate context, a civil conspiracy claim cannot exist between a corporation’s own officers or employees.  This is because corporations can only act through their agents and any acts taken by a corporate employee is imputed to the corporation.

So, for example, if employees 1 and 2 agree to defraud plaintiff, there is no conspiracy since the employees are acting on behalf of the corporation – they are not “two or more persons.”  Since this case’s plaintiff pled the two conspiracy defendants were officers of the same corporate defendant, the trial court properly dismissed the conspiracy count. (¶¶ 29-30)

The appeals court also affirmed the trial court’s denial of the plaintiff’s motion to amend his complaint against the corporate defendant.  While the right to amend pleadings is liberally granted by Illinois courts, the right is not absolute.

In deciding whether to allow a plaintiff to amend pleadings, a court considers (1) whether the amendment would cure a defect in the pleadings, (2) whether the other party would be prejudiced or surprised by the proposed amendment, (3) whether the proposed amendment is timely, and (4) whether there were previous opportunities to amend.

Here, since the plaintiff failed multiple opportunities to make his fraud and conspiracy claims stick, the First District held that the trial court properly denied the plaintiff’s fourth attempt to amend his complaint.

Afterwords:

This case provides a useful summary of fraud’s heightened pleading elements under Illinois law.  It also solidifies the proposition that a defendant can’t conspire with itself: a there can be no corporation-corporate officer conspiracy.  They are viewed as one and the same in the context of a civil conspiracy claim.

The case’s procedural lesson is that while parties normally are given wide latitude to amend their pleadings, a motion to amend will be denied where a litigant has had and failed multiple chances to state a viable claim.

 

Food Maker’s Consumer Fraud Claim For Deficient Buttermilk Formula Tossed (IL ND Case Note)

The food company plaintiff in Kraft Foods v. SunOpta Ingredients, Inc., 2016 WL 5341809 sued a supplier of powdered buttermilk for consumer fraud when it learned that for over two decades the defendant had been selling plaintiff a buttermilk compound consisting of buttermilk powder mixed with other ingredients instead of “pure” buttermilk.

Granting the defendant’s motion to dismiss, the Northern District examines the “consumer nexus” requirement for consumer fraud liability and what conduct by a business entity can still implicate consumer concerns and be actionable under the Consumer Fraud Act, 815 ILCS 505/2 (the “CFA”).

The plaintiff believed it was receiving buttermilk product that wasn’t cut with other ingredients; it relied heavily on a 1996 product specification sheet prepared by defendant’s predecessor that claimed to use only pristine ingredients.

Upon learning that defendant’s buttermilk was not “pure” but was instead a hybrid product composed of buttermilk powder, whey powder, and dried milk, Plaintiff sued.

Dismissing the CFA claim, the Court rejected plaintiff’s argument that the ersatz buttermilk implicated consumer concerns since consumers were the end-users of the product and because consumer health and safety was possibly compromised.

The CFA offers broader protection than common law fraud.  Unlike its common law counterpart, the CFA plaintiff does not have to prove it actually relied on an untrue statement.  Instead, the CFA plaintiff must allege (1) a deceptive or unfair act or practice by defendant, (2) defendant’s intent that plaintiff rely on the deception or unfair practice, (3) the unfair or deceptive practice occurred during a course of conduct involving trade or commerce.

As its name suggests, the CFA applies specifically to consumers which it defines as “any person who purchases or contracts for the purchase of merchandise not for resale in the ordinary course of his trade or business but for his use or that of a member of his household.” 815 ILCS 505/1.  Where a CFA plaintiff is a business entity – like in this case – the court applies the “consumer nexus” test.  Under this test, if the defendant’s conduct is addressed to the market generally or otherwise implicates consumer protection concerns, the corporate plaintiff can have standing to sue under the CFA.

A classic example of conduct aimed at a business that still implicates consumer protection concerns is a defendant disparaging a business plaintiff or misleading consumers about that plaintiff.  But the mere fact that consumers are end product users normally isn’t enough to satisfy the consumer nexus test.  Here, defendants’ actions were twice removed from the consumer: Defendant supplied plaintiff with product who, in turn, incorporated defendant’s buttermilk product into its food offerings.

The Court also rejected plaintiff’s argument that defendant’s product imperiled “public health, safety or welfare issues.”  Since the plaintiff failed to plead any facts to show that defendant’s conduct affected, much less harmed, consumers, there was no consumer nexus (or connection) and plaintiff’s CFA claim failed.

Take-aways:

Even under relaxed Federal notice pleading standards, a consumer fraud plaintiff must still provide factual specifics in its Complaint.  The case illustrates that the consumer nexus test has some teeth.  Where the plaintiff is a sophisticated commercial entity and isn’t using a product as a consumer would, it will be tough for the plaintiff to show consumer protection concerns are involved.

 

Broken Promises In Medical Services Agreement Don’t Equal Fraud – IL Court

An Illinois appeals court recently examined the promissory fraud rule in a medical services contract dispute.

The key principle distilled from the court’s unpublished analysis in Advocate Health and Hospitals Corp. v. Cardwell, 2016 IL App (4th) 150312-U is that where fraud claims are based on false promises of future conduct, the claims will fail.

The plaintiff hospital there sued a former staff doctor for breaching a multi-year written services contract. When the doctor prematurely resigned to join a hospital in another state, the plaintiff sued him to recover about $250,000 advanced to the doctor at the contract’s outset.

The doctor counterclaimed, alleging the hospital fraudulently induced him to sign the contract. He claimed the hospital broke promises to elevate him to a Director position and allow him to develop a new perinatology practice group at the hospital.  Since the promises were false, the doctor claimed, the underlying services contract was void.

Siding with the hospital (it granted the hospital’s summary judgment motion), the Court discussed when a defendant’s fraudulent inducement can nullify a written contract.

In Illinois, to establish fraud in the inducement, a plaintiff must show (1) a false statement of material fact, (2) defendant’s knowledge the statement was false, (3) defendant’s intent to induce the plaintiff’s reliance on the statement, (4) plaintiff’s reasonable reliance on the truth of the statement, and (5) damages resulting from reliance on the statement.

A critical qualification is that the fraud must be based on a misstatement of existing fact; not a future one.  Fraud in the inducement goes beyond a simple breaking of a promise or a prediction that doesn’t come to pass.

Here, the Court found that the hospital’s pre-contract statements all involved future events. The promise of a Directorship for the doctor was merely aspirational. It wasn’t a false statement of present fact.   The Court also determined that the hospital’s representations to the doctor about the development of a perinatology program spoke to a hoped-for future event.

Since the entirety of the doctor’s fraud counterclaim rested on the hospital’s promises of future conduct/events, the Court entered summary judgment against the doctor on his fraud in the inducement counter-claim.

Afterwords:

This is another case that sharply illustrates how difficult it is to prove fraud in the inducement; especially where the alleged misstatements refer to contingent events that may or may not happen.  While a broken promise may be a breach of contract, it isn’t fraud.

For a misstatement to be actionable fraud, it has to involve an actual, present state of affairs. Anything prospective/future in nature will likely be swallowed up by the promissory fraud rule.