Tag: business torts

Fraudulent Transfer Action Can Be Brought In Post-Judgment Proceedings – No Separate Lawsuit Required – IL Court

Despite its vintage (over two decades), Kennedy v. Four Boys Labor Service, 664 N.E.2d 1088 (2nd Dist.  1996), is still relevant and instructional for its detailed discussion of Illinois’ fraudulent transfer statute and what post-judgment claims do and don’t fall within a supplementary proceeding to collect a judgment in Illinois.

The plaintiff won a $70K breach of contract judgment against his former employer and issued citations to discover assets to collect the judgment.

While plaintiff’s lawsuit was pending, the employer transferred its assets to another entity that had some of the same shareholders as the employer.  The “new” entity did business under the same name (Four Boys Labor Service) as the predecessor.

Plaintiff obtained an $82K judgment against the corporate officer who engineered the employer’s asset sale and the officer appealed.

Held: Judgment for plaintiff affirmed

Rules/reasons:

The Court applied several principles in rejecting the corporate officer’s main argument that a fraudulent transfer suit had to be filed in a separate action and couldn’t be brought within the context of the post-judgment proceeding.  Chief among them:

– Supplementary proceedings can only be initiated after a judgment has entered;

– The purpose of supplementary proceedings is to assist a creditor in discovering assets of the judgment debtor to apply to the judgment;

– Once a creditor discovers assets belonging to a judgment debtor in the hands of a third party, the court can order that third party to deliver up those assets to    satisfy the judgment;

– A court can authorize a creditor to maintain an action against any person or corporation that owes money to the judgment debtor, for recovery of the debt (See 735 ILCS 5/2-1402(c)(6);

– A corporate director who dissolves a company without providing proper notice to known creditors can be held personally liable for corporate debts (805 ILCS 5/8.65, 12.75);

– An action to impose personal liability on a corporate director who fails to give notice of dissolution must be filed as a separate lawsuit and cannot be brought in a post-judgment/supplementary proceeding;

– Where a third party transfers assets of a corporate debtor for consideration and with full knowledge of a creditor’s claim, the creditor may treat the proceeds from the sale of the assets as debtor’s property and recover them under Code Section 2-1402;

– A transfer of assets from one entity to another generally does not make the transferee liable for the transferor’s debts;

– But where the transferee company is a “mere continuation” of the selling entity, the transferee can be held responsible for the seller’s debt.  The key inquiry in determining successor liability under the mere continuation framework is whether there is continuity of shareholder or directors from the first entity to the second one;

– An action brought under the Uniform Fraudulent Transfer Act (FTA), 740 ILCS 160/1, is considered one that directly concerns the assets of the judgment debtor and imposes liability on the recipient/transferee based on the value of the transferred assets;

– A transfer is not voidable against one who takes in good faith and provides reasonably equivalent value.  740 ILCS 160/9;

– A court has discretion to sanction a party that disobeys a court order including by entering a money judgment against the offending party;

(664 N.E.2d at 1091-1093)

Applying these rules, the Court found that plaintiff could properly pursue its FTA claim within the supplementary proceeding and didn’t have to file a separate lawsuit.  This is because an FTA claim does not affix personal liability for a corporate debt (like in a corporate veil piercing or alter ego setting) but instead tries to avoid or undo a transfer and claw back the assets actually transferred.

FTA Section 160/5 sets forth eleven (11) factors that can point to a debtor’s actual intent to hinder, delay or defraud a creditor.   Some of the factors or “badges” of fraud that applied here included the transfer was made to corporate insiders, the failure to inform the plaintiff creditor of the transfer of the defendant’s assets, the transfer occurred after plaintiff filed suit, the transfer rendered defendant insolvent, and all of the defendant’s assets were transferred.  Taken together, this was enough evidence to support the trial court’s summary judgment for the plaintiff on his FTA count.

Take-away: Kennedy’s value lies in its stark lesson that commercial litigators should leave no financial stones unturned when trying to collect judgments.  Kennedy also clarifies that fraudulent transfer actions – where the creditor is trying to undo a transfer to a third party and not hold an individual liable for a corporate debt can be brought within the confines of a supplementary proceeding.

 

British Firm’s Multi-Million Dollar Trade Secrets Verdict Upheld Against Illinois Construction Equipment Juggernaut – IL Fed Court

Refusing to set aside a $73-plus million jury verdict for a small British equipment manufacturer against construction giant Caterpillar, Inc., a Federal court recently examined the contours of the Illinois trade secrets statute and the scope of damages for trade secrets violations.

The plaintiff in Miller UK, Ltd. v. Caterpillar, Inc., 2017 WL 1196963 (N.D.Ill. 2017) manufactured a coupler device that streamlined the earthmoving and excavation process.  Plaintiff’s predecessor and Caterpillar entered into a 1999 supply contract where plaintiff furnished the coupler to Caterpillar who would, in turn, sell it under its own name through a network of dealers.

The plaintiff sued when Caterpillar terminated the agreement and began marketing its own coupler – the Center-Lock – which bore an uncanny resemblance to plaintiff’s coupler design.

After a multi-week trial, the jury found for the plaintiff on its trade secrets claim and for Caterpillar’s on its defamation counterclaim for $1 million – a paltry sum dwarfed by the plaintiff’s outsized damages verdict.

The Court first assessed whether the plaintiff’s three-dimensional computerized drawings deserved trade secrets protection.

The Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/1, defines a trade secret as encompassing information, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers that (1) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

Misappropriation means “disclosure” or “use” of a trade secret by someone who lacks express or implied consent to do so and where he/she knows or should know that knowledge of the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use.  Intentional conduct, howver, isn’t required: misappropriation can result from a defendant’s negligent or unintentional conduct.

Recoverable trade secret damages include actual loss caused by the misappropriation and unjust enrichment enjoyed by the misappropriator.  Where willful and malicious conduct is shown, the plaintiff can also recover punitive damages.  765 ILCS 1065/4.

In agreeing that the plaintiff’s coupler drawings were trade secrets, the Court noted plaintiff’s expansive use of confidentiality agreements when they furnished the drawings to Caterpillar and credited plaintiff’s trial testimony that the parties’ expectation was for the drawings to be kept secret.

The Court also upheld its trial rulings excluding certain evidence offered by Caterpillar.  One item of evidence rejected by the court as hearsay was a slide presentation prepared by Caterpillar to show how its coupler differed from plaintiff’s and didn’t utilize plaintiff’s confidential data.

Hearsay prevents a litigant from using out-of-court statements to prove the truth of the matter asserted.  An exception to the hearsay rule applies where an out-of-court statement (1) is consistent with a declarant’s trial testimony, (2) the party offering the statement did so to rebut an express or implied charge of recent fabrication or improper motive against the declarant, (3) the statement was made before the declarant had a motive for fabrication, and (4) the declarant testifies at trial and is subject to cross-examination.

Since the slide show was made as a direct response to plaintiff’s claim that Caterpillar used plaintiff’s confidential information, the statement (the slide show) was made after Caterpillar had a motive to fabricate the slide show.

The Court then affirmed the jury’s $1M verdict on Caterpillar’s defamation counter-claim based on plaintiff’s falsely implying that Caterpillar’s coupler failed standard safety tests in written and video submissions sent to Caterpillar’s equipment dealers.  The plaintiff’s letter and enclosed DVD showed a Caterpillar coupler bucket breaking apart and decapitating a life-size dummy. (Ouch!)  The obvious implication being that Caterpillar’s coupler is unsafe.

The Court agreed with the jury that the plaintiff’s conduct was actionable as per se defamation.  A quintessential defamation per se action is one alleging a plaintiff’s lack of ability or integrity in one’s business.  With per se defamation, damages are presumed – meaning, the plaintiff doesn’t have to prove mathematical (actual) monetary loss.

Instead, all that’s required is the damages assessed “not be considered substantial.”  Looking to an earlier case where the court awarded $1M for defamatory statements in tobacco litigation, the Court found that the jury’s verdict against the plaintiff coupler maker here was proper.

Afterwords:

The wide use of confidentiality agreements and evidence of oral pledges of secrecy can serve as sufficient evidence of an item’s confidential nature for purposes of trade secrets liability.  Trade secrets damages can include actual profits lost by a plaintiff, the amount the defendant (the party misappropriating the trade secrets) was unjustly enriched through the use of plaintiff’s trade secrets and, in some egregious cases, punitive damages.

The case also shows that a jury has wide latitude to fashion general damage awards in per se defamation suits.  This is especially so in cases involving deep-pocketed defendants.

 

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.