Contractual Indemnity Clause May Apply to Direct Action in Bond Offering Snafu; No Joint-Work Copyright Protection for PPM – IL ND

The Plaintiff in UIRC-GSA Holdings, Inc. v. William Blair & Company, 2017 WL 3706625 (N.D.Ill. 2017), sued its investment banker for copyright infringement and professional negligence claiming the banker used the plaintiff’s protected intellectual property – private placement memoranda – to get business from other clients.  The parties previously executed an engagement agreement (“Agreement”) which required the banker to facilitate plaintiff’s purchase of real estate through bond issues.

The banker denied infringing plaintiff’s copyrights and counterclaimed for breach of contract, contractual indemnity and tortious interference with contract.  Plaintiff moved to dismiss all counterclaims.

In partially granting and denying the (12(b)(6)) motion to dismiss the counterclaims, the Northern District examined the pleading elements for joint-author copyright infringement and tortious interference claims and considered the reach of contractual indemnification provisions.

The counterclaiming banker first asserted that it was a joint owner of the private placement documents and sought an accounting of the plaintiff’s profits generated through use of the materials.  Rejecting this argument, the Court stated the Copyright’s definition of a ‘joint work’: “a work prepared by two or more authors with the intention that the authors’ work be merged into inseparable or interdependent parts of a unitary whole.” 17 U.S.C. 101.

To establish co-authorship, the copyright plaintiff must establish (1) an intent to create a joint work, and (2) independently copyrightable contributions to the material.  The intent prong simply means the two (or more) parties intended to work together to create a single product; not that they specifically agreed to be legal co-copyright holders.

To meet the independently copyrightable element (the test’s second prong), the Court noted that “ideas, refinements, and suggestions” are not copyrightable.  Instead, the contributed work must possess a modicum of creativity vital to a work’s end product and commercial viability.

Here, while the counter-plaintiff alleged an intent to create a joint work, it failed to allege any specific contributions to the subject private placement documents.  Without specifying any copyrightable contributions to the documents, the investment firm failed to satisfy the pleading standards for a joint ownership copyright claim.

The court next considered the banker’s indemnification claim – premised on indemnity (one party promises to compensate another for any loss) language in the Agreement. The provision broadly applied to all claims against the counter-plaintiff arising from or relating to the Agreement.  The plaintiff argued that by definition, the indemnity language didn’t apply to direct actions between the parties and only covered third-party claims (claims brought by someone other than plaintiff or defendant).

The Court rejected this argument and found the indemnity language ambiguous.  The discrepancy between the Agreement’s expansive indemnification language in one section and other Agreement sections that spoke to notice requirements and duties to defend made it equally plausible the indemnity clause covered both third-party and first-party/direct actions.  Because of this textual conflict, the Court held it was premature to dismiss the claim without discovery on the parties’ intent.

The court also sustained the banker’s tortious interference counterclaim against plaintiff’s motion to dismiss.  The counter-plaintiff alleged the plaintiff sued and threatened to continue suing one of the counter-plaintiff’s clients (and a competitor of the plaintiff’s) to stop the client from competing with the plaintiff in the bond market.  While the act of filing a lawsuit normally won’t support a tortious interference claim, where a defendant threatens litigation to dissuade someone from doing business with a plaintiff can state a tortious interference claim.

Take-aways:

Contractual indemnity provisions are construed like any other contract.  If the text is clear, it will be enforced as written.  In drafting indemnity clauses, the parties should take pains to clarify whether it applies only to third-party claims or if it also covers direct actions between the parties.  Otherwise, the parties risk having to pay the opposing litigant’s defense fees.

Filing a lawsuit alone, isn’t enough for a tortious interference claim.  However, the threat of litigation to dissuade someone from doing business with another can be sufficient business interference to support such a claim.

Joint ownership in copyrighted materials requires both an intent for joint authorship and copyrightable contributions from each author to merit legal protection.

 

Family Trust Set Up in Good Faith Shields Family Member from Creditor – IL Case Note

In Hickory Point Bank & Trust v. Natual Concepts, Inc., 2017 IL App (3d) 160260, the appeals court affirmed a trial court’s denial of a judgment creditor’s motion to impose a judicial lien and order the turnover of trust assets.

The corporate defendant defaulted on the loan that was guaranteed by corporate principals.

Plaintiff entered confessed judgments against the corporate and individual defendants.

Through post-judgment proceedings, plaintiff learned one of the individual defendants was trustee of an irrevocable family trust whose sole asset was four pieces of real estate formerly owned by the defendant’s father.

The document provided that upon death of defendants’ parents, the trust assets would be distributed 85% to defendant with the rest (15%) going to defendant’s three sons.

To satisfy its default judgment against defendant, plaintiff alternately moved to liquidate and turnover the trust assets and to impress a judicial lien against the trust property.

The trial court held that the trust was protected from judgment creditors under Code section 2-1403 (735 ILCS 5/2-1403) and denied the plaintiff’s motion. Plaintiff appealed.

The central issue was whether or not the trust was self-settled.  A “self-settled” trust is “a trust in which the settlor is also the person who is to receive the benefits from the trust, usually set up in an attempt to protect the trust assets from creditors.” Black’s Law Dictionary 1518 (7th ed. 2002).

Like most states, Illinois follows the general rule that a self-settled trust created for the settlor’s own benefit will not protect trust assets from the settlor’s creditors. See Rush University Medical Center v. Sessions, 2012 IL 112906, ¶ 20.

Code Section 2-1403 codifies the rule that protects trusts that are not self-settled.  This statute states:

“No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor.” 735 ILCS 5/2–1403 (West 2014).

Based on the plain statutory text, a creditor’s judgment cannot be satisfied by funds held in trust for a judgment debtor where (1) the trust was created in good faith and (2) a person other than the judgment debtor created the trust or the funds held in trust proceeded from someone other than the judgment debtor.

Here, there was evidence that the trust was formed in good faith.  It pre-dated by five years the date of the commercial loan and defendants’ default.  There was no evidence the trust was created to dodge creditors like the plaintiff.  The trust language stated it was designed for the care of Defendant’s elderly parents during their lifetimes.

The Court also deemed significant that Defendant was not the trust beneficiary. Again, the trust was set up to benefit Defendants’ parents and the trust was funded with the parents’ assets.  Because the trust assets originated from someone other than the defendant, the second prong of Section 2-1403 was satisfied.

Plaintiff’s alternative argument that the court should impress a judicial lien against defendant’s 85% trust interest also failed.  The law is clear that a creditor may not impose a lien on funds that are in the hands of a trustee.  But once those trust funds are distributed to a beneficiary, a creditor can access them. (¶¶ 26-27)

Since thse trust assets (the four real estate parcels) had not been distributed to defendants under the terms of the trust, defendant’s interest in the properties could not be liened by the plaintiff.

Afterwords:

A good example of a family trust shielding trust assets from the reach of a family member’s creditor.

Self-settled trusts (trusts where the settlor and beneficiary are the same person) are not exempt from creditor interference.  However, where the trust is created in good faith and funded with assets originating from someone other than a debtor, a creditor of that debtor will not be able to attach the trust assets until they “leave” the trust and are distributed to the debtor.

 

Getting E-Mails Into Evidence: (Ind.) Federal Court Weighs In

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Since e-mail is the dominant form of business communication across the globe, it’s no surprise that it comprises a large chunk of the documents used as evidence at a business dispute trial.

Email’s prevalence in lawsuits makes it crucial for litigators to understand the key evidence authenticity and foundational rules that govern whether an email gets into evidence.  This is especially true where an email goes to the heart of a plaintiff’s claims (or defendant’s defenses) and the e-mail author or recipient denies the e-mail’s validity.

Finnegan v. Myers, 2015 WL 5252433 (N.D. Ind. 2015), serves as a recent example of a Federal court applying fundamental evidence rules to the e-mail communications context.

In the case, the plaintiffs, whose teenaged daughter died under suspicious circumstances, sued various Indiana child welfare agencies for lodging criminal child neglect charges against them that were eventually dropped.  The plaintiffs then filed Federal civil rights and various due process claims against the defendants.

The defendants moved for summary judgment and then sought to strike some of plaintiffs’ evidence opposing summary judgment.  A key piece of evidence relied on by the plaintiff in opposing summary judgment that the defendants sought to exclude as improper hearsay was an e-mail from a forensic pathologist to child welfare personnel that called into questions the results of a prior autopsy of the deceased.

Denying defendants’ two motions (the summary judgment motion and motion to strike), the Court provides a useful gloss on the operative evidence rules that control e-mail documents in litigation.

  • The Federal Rules of Evidence (FRE) require a proponent to produce evidence sufficient to support a finding the item is authentic – that it is what the proponent claims it to be;
  • FRE 901 recognizes several methods of authentication including witness testimony, expert or non-expert comparisons, distinctive characteristics, and public records, among others;
  • FRE 902 recognizes certain evidence as inherently trustworthy and “self-authenticating” (requiring no additional proof of authenticity).  Evidence in this camp includes public records, official publications, newspapers and periodicals, commercial paper, and certified domestic records of a regularly conducted activity;
  • Authentication only relates to the source of the documents – it does not mean that the documents’ contents are taken as true;
  • E-mails may be authenticated by circumstantial evidence such as (a) viewing the e-mail’s contents in light of the factual background of the case, (b) identifying the sender and receiver via affidavit, (c) identifying the sender by the e-mail address from which the e-mail was sent, (d) comparing the email’s substance to other evidence in the case, and (e) comparing the e-mail to other statements by the claimed author of a given email.

(** 5-6)

Applying these guideposts, the court found that the plaintiff sufficiently established that the subject email was genuine (i.e., it was what it purported to be) and that it was up to the jury to determine what probative value the email evidence had at trial.

The court also agreed with the plaintiff that the pathologist’s email wasn’t hearsay: it was not used for the truth of the email.  Instead, it was simply used to show that the State  agency was put on notice of a second autopsy and changes in the pathologist’s cause of death opinions.

Afterwords:

This case resonates with me since I’ve litigated cases in the past where a witness flatly denies sending an email even though it’s from an e-mail address associated with the witness.  In those situations. I’ve had to compile other evidence – like the recipient’s affidavit – and had to show the denied email is congruent with other evidence in the case to negate the denial.

Finnegan neatly melds FRE 901 and 902 and provides a succinct summary of what steps a litigator must take to establish the authenticity of e-mail evidence.