Tag: business torts

Creditor (Bank) -Debtor (Borrower) Relationship Not A Fiduciary One – IL First Dist. (I of II)

Kosowski v. Alberts, 2017 IL App (1st) 170622 – U, examines some signature commercial litigation remedies against the factual backdrop of a business loan default.

The plaintiffs, decades-long business partners in the printing and direct mail industry, borrowed money under a written loan agreement that gave the lender wide-ranging remedies upon the borrowers’ default. Plaintiffs quickly fell behind in payments and went out of business within two years. A casualty of the flagging print media business, the plaintiffs not only defaulted on the loan but lost their company collateral – the printing facility, inventory, equipment and accounts receivable -, too.

Plaintiffs sued the bank and one of its loan officers for multiple business torts bottomed on the claim that the bank prematurely declared a loan default and dealt with plaintiffs’ in a heavy-handed way.  Plaintiffs appealed the trial court’s entry of summary judgment for the defendants.

Affirming, the First District dove deep into the nature and reach of the breach of fiduciary duty, consumer fraud, and conversion torts under Illinois law.

The court first rejected the plaintiff’s position that it stood in a fiduciary position vis a vis the bank. A breach of fiduciary duty plaintiff must allege (1) the existence of a fiduciary duty on the part of the defendant, (2) defendant’s breach of that duty, and (3) damages proximately resulting from the breach.

A fiduciary relationship can arise as a matter of law (e.g. principal and agent; lawyer-client) or where there is a “special relationship” between the parties (one party exerts influence and superiority over another).  However, a basic debtor-creditor arrangement doesn’t rise to the fiduciary level.

Here, the loan agreement explicitly disclaimed a fiduciary arrangement between the loan parties.  It recited that the parties stood in an arms’ length posture and the bank owed no fiduciary duty to the borrowers.  While another loan section labelled the bank as the borrowers’ “attorney-in-fact,” (a quintessential fiduciary relationship) the Court construed this term narrowly and found it only applied upon the borrower’s default and spoke only to the bank’s duties concerning the disposition of the borrowers’ collateral.  On this point, the Court declined to follow a factually similar Arkansas case (Knox v. Regions Bank, 103 Ark.App. 99 (2008)) which found that a loan’s attorney-in-fact clause did signal a fiduciary relationship.  Knox had no precedential value since Illinois case authorities have consistently held that a debtor-creditor relationship isn’t a fiduciary one as a matter of law. (¶¶ 36-38)

Next, the Court found that there was no fiduciary relationship as a matter of fact.  A plaintiff who tries to establish a fiduciary relationship on this basis must produce evidence that he placed trust and confidence in another to the point that the other gained influence and superiority over the plaintiff.  Key factors pointing to a special relationship fiduciary duty include a disparity in age, business acumen and education, among other factors.

Here, the borrowers argued that the bank stood in a superior bargaining position to them.  The Court rejected this argument.  It noted the plaintiffs were experienced businessmen who had scaled a company from 3 employees to over 350 during a three-decade time span.  This lengthy business success undermined the plaintiffs’ disparity of bargaining power argument

Take-aways:

Kosowski is useful reading for anyone who litigates in the commercial finance arena. The case solidifies the proposition that a basic debtor-creditor (borrower-lender) relationship won’t rise to the level of a fiduciary one as a matter of law. The case also gives clues as to what constitutes a special relationship and what degree of disparity in bargaining power is required to establish a factual fiduciary duty.

Lastly, the case is also instructive on the evidentiary showing a conversion and consumer fraud plaintiff must make to survive summary judgment in the loan default context.

 

Binding LLC to Operating Agreement A Substantive Change in Illinois Law; No Retroactive Effect – IL Court

The summer of 2017 ushered in a slew of changes, to Illinois’ limited liability company statute, 805 ILCS 180/15-1 et seq. (the “Act”).  Some of the key Act amendments included clarifying LLC member rights to access company records, explaining if and when a member or manager’s fiduciary duties can be eliminated or reduced, tweaking the Act’s judgment creditor remedies section, and changing the Act’s conversion (e.g. partnership to LLC or vice versa) and domestication rules.

Q Restaurant Group Holdings, LLC v. Lapidus, 2017 IL App (2d) 170804-U, examines another statutory change – one that binds an LLC to an operating agreement (OA) even where the LLC doesn’t sign it. See 805 ILCS 180/15-5.

The OA is the LLC’s governing document that sets forth each member’s (or manager’s) respective rights and obligations concerning contribution, distribution, voting rights and the like. The OA’s signing parties are typically the LLC members/managers – not the LLC itself.  Legally, this is significant because under privity of contract principles – only a party to a written agreement can sue to enforce it.

2017’s LLC Act changes make it clear that the LLC entity has standing to sue and be sued under the OA regardless of whether or not the LLC signed it.

The plaintiff in Lapidus sued the defendant for various business torts including conversion and tortious interference with contract. The defendant moved to dismiss the suit based on mandatory arbitration language in the OA.  Denying defendant’s Section 2-619 motion, the Court held that since the amended Section 15-5 of the Act worked a substantive change to the former LLC Act section, it didn’t apply retroactively. (The OA in Lapidus preceded the 2017 amendments.)

Rules/reasoning:

Affirming the trial court, the First District examined the dichotomy between procedural and substantive changes to legislation.  Where a statutory amendment is enacted after a lawsuit is filed, the Court looks to whether the legislature specified the reach (i.e. does it apply retroactively?) of the amendment.  Where new legislation is silent on its scope, the Court determines whether a given amendment is procedural or substantive.  If procedural, the amendment has retroactive effect.  If the change is substantive, however, it will only apply prospectively.

A procedural change is one that “prescribes the method of enforcing rights or obtaining redress” such as pleadings, evidence and practice.  A substantive change, by contrast, is one that establishes, creates or defines legal rights.  (¶¶ 15-16; citing to Landgraf v. USI Film Products, 511 U.S. 244, 280 (1994); 5 ILCS 70/4 (Illinois’s Statute on Statutes))

In finding that amended Section 15-5 was a substantive change to Illinois’ LLC Act (and therefore couldn’t be applied retroactively) the court noted the amended statute “established a contractual right” by binding the LLC to an OA it never signed.

Since the plaintiff LLC in Lapidus never signed the OA, the Court couldn’t require the plaintiff to follow the OA’s arbitration clause without substantially altering the LLC’s contract rights.  As a result, the Court held that amended Section 15-5 did not apply to the pre-amendment OA and the plaintiff didn’t have to adhere to the arbitration clause.t have to adhere to the OA’s arbitration provisions. (¶¶ 18-19).

Afterwords:

I. To decide if a statutory amendment applies retroactively (as opposed to only being forward-looking), the court considers whether the change is procedural or substantive.

II. While the distinction between procedural and substantive isn’t always clear, Lapidus stands for proposition a change in the law that alters a parties basic contract rights (such as by making a non-party a party to an operating agreement) is substantive and will only apply in the future.

III.  And though the case is unpublished, Lapidus still makes for interesting reading in light of Illinois’ manifold LLC Act changes.  With so many recent statutory changes (see here_for example), this case likely augurs an uptick in cases interpreting the 2017 LLC Act amendments.

Truth Is Defense to Employee Intentional Interference With Contract Suit – IL Court

 

 

The Illinois First District recently discussed the contours of pre-suit discovery requests in cases that implicate fee speech concerns and whether truthful information can ever support an intentional interference with employment claim.

After relocating from another state to take a compliance role with a large bank, the plaintiff in Calabro v. Northern Trust Corporation, 2017 IL App (1st) 163079-U, was fired after only two weeks on the job for failing to disclose his forced removal from a prior compliance position.

When the employer wouldn’t spill the tea on the snitch’s identity, plaintiff sued.  The trial court dismissed plaintiff’s pre-suit discovery petition and plaintiff appealed.

Affirming, the Court construed pre-suit discovery requests under Supreme Court Rule 224 narrowly.  That rule allows a petitioner to discover the identity of someone who may be responsible in damages to petitioner.

To initiate a request for discovery under Rule 224, the petitioner files a verified petition that names as defendant the person(s) from whom discovery is sought and states why discovery (along with a description of the discovery sought) is necessary.  An order granting a Rule 224 petition is limited to allowing the plaintiff to learn the identity of the responsible party or to at least depose him/her.

To show that discovery is necessary, the petitioner must present sufficient allegations of actionable harm to survive a Section 2-615 motion to dismiss.  That is, the petition must state sufficient facts to state a recognized cause of action.

But Rule 224 limits discovery to the identity of someone who may be responsible to the petitioner.  A petitioner cannot use Rule 224 to engage in a “vague and speculative quest to determine whether a cause of action actually exists.”

Here, the petitioner didn’t know what was actually said by the third party respondent. The Court viewed this as a tacit admission the plaintiff didn’t know if he had a valid claim.

The Court then focused on the veracity of the third-party’s statement.  To be actionable, an intentional interference claim requires the supply of false data about a plaintiff.  Accurate and truthful information, no matter how harmful, cannot underlie an intentional interference action. This is because allowing someone to sue on truthful information violates the First Amendment (to the Constitution) and chills free speech.

Truthful statement immunity is also supported by Section 772 of the Restatement (Second) of Torts which immunizes truthful information from contract interference liability.  [(¶¶ 18-19].  And since the plaintiff’s claim was based on true information – that plaintiff was fired from his last job – the prospective interference claim was doomed to fail.

Afterwords:

This case portrays an interesting application of Rule 224 – a device often employed in the personal injury context.  While the rule provides a valuable tool for plaintiffs trying to identify possible defendants, it doesn’t allow a freewheeling “fishing expedition,”  The petitioner must still state a colorable claim.  In this case, the Court viewed the potential for stifling free speech more worrisome than the individual plaintiff’s private contract rights.