Illinois Fraud and Civil Conspiracy Basics – Illinois Law

In Al Maha Trading v. Darley, 2014 WL 2459674 (N.D. Ill. 2014), the plaintiff brought fraud and civil conspiracy claims in connection with a fire truck sales contract.  The plaintiff, a Saudi Arabia-based fire and rescue services company, ordered six fire trucks and related equipment from the  Illinois-based defendant.

The plaintiff claimed the defendant submitted inflated invoices for the trucks and paid nearly $500k in secret kickbacks to plaintiff’s agent.

The Northern District denied defendant’s motion to dismiss and summarized Illinois fraud and civil conspiracy law in the process.

Fraudulent Misrepresentation and Omission

The elements of common law fraud are: (1) a false statement of material fact, (2) knowledge that the statement was false, (3) intent to induce the defendant to act, (4) reliance on the statement by the plaintiff; and (5) damages.

Fraudulent concealment has the same elements with the additional requirement that the plaintiff show the defendant omitted or concealed a material fact when it had a duty to disclose it.

The Court held that plaintiff’s claims of inflated invoices and bribes to plaintiff’s agent sufficiently alleged a misrepresentation (the false invoices) and concealment (failure to alert plaintiff to defendant’s bribe payments).

The plaintiff also adequately pled that the defendant knew the invoices were false, that plaintiff relied on them and sustained monetary damages by paying several million dollars for the trucks.

Civil Conspiracy

The Court also sustained the plaintiff’s civil conspiracy claim.  The plaintiff alleged that the defendant and plaintiff’s Fire  Chief conspired to submit excessive equipment price lists to the plaintiff so that defendant could make truck sales and cover the secret kickbacks to plaintiff’s agent.

To plead and prove a civil conspiracy in Illinois, the plaintiff must demonstrate (1) a combination of two or more persons, (2) for the purpose of accomplishing either an unlawful purpose or a lawful purpose by unlawful means, (3) concerted action, and (4) an overt tortious or unlawful act to further the plan.  (*8).

The Court found that plaintiff alleged all of these elements.  The combination consisted of defendant and the plaintiff’s agent who received the secret kickbacks.  The unlawful means consisted of defendant submitting swollen invoices and paying secret bribes to the agent.

While a conspiracy claim will normally not lie against a corporation acting through one of its officers based on agency rules (because the corporation can only act through its agents), that rule doesn’t apply in cases where the corporate officer actively participates in the tortious conduct.

Here, the plaintiff’s agent actively participated in the kickback scheme – an unlawful act taken in connection with accomplishing a lawful purpose – the sale of the fire trucks.  (*9).  As a result, the Fire Chief’s actions in arranging the bribes were separate from his role as a corporate agent.

Consumer Fraud Act – Can A Foreign Corporation Sue Under the Act?

The Court answered “yes.”  To determine whether a non-resident can invoke protections of the Illinois consumer fraud statute, the Court considers (a) the parties’ residence, (b) location of the transaction and of plaintiff’s contacts with defendant, (d) the place where the contracts were executed and performed, (e) where the deceptive statements were made, and (f) where payments were sent to and from. (*10).

The Court held that the plaintiff alleged enough of a connection with Illinois to allow it to sue for consumer fraud.  Plaintiff’s contacts with Illinois were initiated by defendant (an Illinois corporation) and the subject matter of the contract – the fire trucks – originated in and were shipped to plaintiff from Illinois.  Taken together, these factors led the Court to uphold the consumer fraud claim despite plaintiff’s foreign company status. (*10).

Afterwords:

– a foreign company can utilize the Illinois consumer fraud statute against an Illinois company – at least at the pleading stage;

–  a corporate officer who participates in a fraudulent scheme can be personally liable on a civil conspiracy claim.

 

 

Case Summary: Star Forge v. F.C. Mason (Part 1 of 2): Breach of Fiduciary Duty and Corporate Opportunity Rule (IL Law)

A corporate officer’s fiduciary duties to his corporate employer and the monetary damages that flow from a breach of those duties are two of the key issues dissected and applied by the Second District appeals court in Star Forge, Inc. v. Ward, 2014 IL App (2d) 130527-U.

Plaintiff was a steel company that sued its former President and some rival steel companies after he secretly entered into separate employment and sales commission agreements with those companies and even formed his own competing steel sales venture – all while employed by the plaintiff.  The plaintiff sued for breach of fiduciary, breach of contract and fraud and sought damages equal to about a decades’ worth of payments it made to the defendant.  After settling with the corporate competitor defendants, the plaintiff went forward on its claims against its former President.  The trial court granted summary judgment for the plaintiff and entered judgment of over $700K against the defendant.  Defendant appealed.

Held: Affirmed

Q: Why?

A:  The Court found that the defendant breached his duties of loyalty to his company (the plaintiff) by surreptitiously entering into deals with rival manufacturers and by forming a stealth sales representative entity that marketed towards plaintiff’s customers.

In Illinois, to prevail on a breach of fiduciary duty claim, the plaintiff must show: (1) existence of a fiduciary duty, (2) breach of that duty, and (3) damages flowing from the breach;

– A corporate officer is a quintessential fiduciary of his company and has the duty to act with “utmost good faith and loyalty” in managing the company;

– A corporate officer breaches his fiduciary duties where (a) he tries to enhance his personal interests at the expense of the corporate interests, or (b) he hinders his corporate employer’s ability to carry on its business;

– Where a corporate officer solicits business for his own benefit or uses his employer’s facilities or resources to further his personal interests without informing his company, he breaches his fiduciary duties to the company;

– To show breach of fiduciary duty by diversion of business opportunity, all that’s required is that the other companies benefitting from the officer’s actions are in the same line of businessas the plaintiff/employer; the companies don’t have to be direct competitors;

– Under the corporate opportunity doctrine, a fiduciary (like a corporate officer) can’t take advantage of business opportunities unless he first presents that opportunity to his employer;

– A business opportunity belongs to a plaintiff employer if it is “reasonably incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage”;

– A corporate officer can’t divert a business opportunity merely because he suspects that his employer lacks the legal or financial capability to take advantage of that opportunity.

(¶¶ 18-24).

The Court found that the defendant unquestionably breached his fiduciary duties by diverting business to plaintiff’s competitors and by forming a corporation that secretly sold to plaintiff’s customers.  Significantly, the defendant failed to first offer to his employer a lucrative deal involving John Deere – one of plaintiff’s largest customers.  The Court rejected defendant’s arguments that some of the business defendant steered from the plaintiff was outside the parameters of plaintiff’s capabilities.  It was enough that the diverted business was possibly or arguably within the scope of plaintiff’s business to establish defendant’s breach of his duties to his employer.  Id.

Take-aways: Though this case is unpublished, Star Forge provides clean synopsis of Illinois breach of fiduciary duty rules, the corporate opportunity doctrine and what a plaintiff must show to prove that an officer wrongfully usurped a business opportunity belonging to the plaintiff.  The case also shows that an officer’s belief as to whether or not his employer can “handle” or service a given opportunity doesn’t matter.  All that’s required for the employer to show a breach is that the diverted business opportunity falls within the possible range of the employer’s business, services and resources.