Shortened ‘Arb Award’ Rejection Deadline Upheld Against Constitutional Attack – IL Appeals Court

The First District appeals court recently nixed a plaintiff’s constitutional challenge to a local rule’s arbitration rejection deadline.  The opinion’s upshot is clear: when a supreme court rule conflicts with a statute, the rule wins.

The plaintiff in McBreen v. Mercedes-Benz, USA, LLC  argued her equal protection and due process rights were violated when a trial court denied her attempt to tardily reject an arbitration award. The case was decided by a single arbitrator under the auspices of the Cook County Law Division Mandatory Arbitration Program (MAP), a two-year pilot program that sends commercial cases with damage claims between $50,000 and $75,00 to mandatory arbitration.

Among other things, the Law Division MAP provides for hearings before a single arbitrator and requires a losing party to reject the award within seven business days. Cook County Cir. Ct. R. 25.1, 25.5, 25.11.

After an arbitrator found for defendants, the plaintiff didn’t reject the award until 30 days later – 23 days too late. The trial court then granted defendant’s motion to dismiss plaintiff’s case and denied plaintiff’s motion to void the arbitration award or extend the rejection deadline.  The trial court entered judgment on the arbitration award for defendant.

Plaintiff argued on appeal that Rule 25’s compressed rejection period violated her constitutional rights since it conflicted with the  30-day rejection deadline for Municipal Department arbitrations. (The Cook County Municipal Department hears personal injury cases and breach of contract suits where the damage claim is $30,000 or less.)   The plaintiff also claimed the Law Division MAP was unconstitutional since it clashed with the “panel of three” arbitrators rule prevailing in Municipal Department arbitrations.

Affirming the trial court, the Court first considered whether the Illinois Supreme Court had power to establish the Law Division MAP program with its seven-day rejection rule.

The Law Division MAP rejection period conflicts with Cook County’s Municipal Department arbitration scheme – which has a 30-day rejection rule.  (The Municipal arbitration rules, codified in Supreme Court Rules 86-95, were legislatively implemented via Code Sections 2-1001A and 1003A which, respectively, authorize the establishment of an arbitration program where a panel of three arbitrators hears cases involving less than $50,000 in damages. Rule 93(a) contains the 30-day rejection cut-off.)

The First District noted that while the Law Division MAP’s seven-day rejection period clashes with the Municipal Department’s 30-day period, Illinois courts through the decades consistently recognize the Illinois Supreme Court’s constitutional authority to make rules governing practice and procedure in the lower courts and that where a supreme court rule conflicts with a statute on a judicial procedure matter, the rule wins.

The court also notes the Illinois legislature echoed this inherent power for the Supreme Court to establish court rules in Code Section 1-104(a).  In the end, the Court found that In view of the Illinois Supreme Court’s expansive power in the area of pleadings, practice and procedure, the Law Division MAP’s abbreviated rejection period trumped any conflicting, longer rejection period found in other statutes or rules.  (¶¶ 17-18, 22-23).

The Court also rejected plaintiff’s equal protection argument – that the Law Division MAP program infringed the rights of Municipal court participants by shortening the rejection time span from 30 to seven days.  While allowing that Law Division and Municipal litigants in the arbitration setting share the same objective of taking part in a less-costly alternative to litigation, the Court found the two Programs “qualitatively different:” the Law Division MAP is geared to those seeking damages of between $50,000 and $75,000 while the Municipal plaintiff’s damages are capped at $30,000.

According to the Court, the different damage ceilings involved in Law Division and Municipal cases meant that plaintiffs in the two court systems aren’t similarly situated under the Equal Protection clause. (¶¶ 34-35).

Plaintiff’s final argument, that the Law Division MAP’s seven-day rejection period violated her due process rights also failed.  Due process requires an opportunity to be heard at a meaningful time and in a meaningful matter.

The plaintiff argued that the Law Division MAP’s seven-day rejection cut-off failed to give her a meaningful opportunity to challenge the award.   The Court thought otherwise.  It noted that statutes are presumed constitutional and someone challenging a statute’s constitutionality bears a heavy burden.  It then cited to multiple cases across a wide strata of facts which have upheld time limits of less than 30 days.

Afterwords:

McBreen offers a thorough, triangulated analysis of what happens when a Supreme Court Rule, a county’s local court rule and legislative enactments all speak to the same issue and appear to contradict each other.  The case solidifies the proposition that the Supreme Court’s primacy in the realm of lower court procedure and pleading extends to mandatory arbitration regimes, too.  While the case is silent on what constitutes a sufficient basis to extend the Law Division MAP’s seven-day rejection deadline, McBreen makes clear that a constitutional challenge will likely ring hollow.

 

Appeals Court Gives Teeth to “Good Faith” Requirement of Accord and Satisfaction Defense

A common cautionary tale recounted in 1L contracts classes involves the crafty debtor who secretly short-pays a creditor but notes “payment in full” on his check. According to the classic “gotcha” vignette, the debtor’s devious conduct forever bars the unwitting creditor from suing the debtor.

Whether apocryphal or not (like the one about the newly minted lawyer who accidentally brought a marijuana cigarette into the courthouse and forever lost his license after less than 3 hours of practice) the fact pattern neatly illustrates the accord and satisfaction rue. Accord and satisfaction applies where a creditor and debtor have a legitimate dispute over amounts owed on a note (or other payment document) and the parties agree on an amount (the “accord”) the debtor can pay (the “satisfaction”) to resolve the disputed claim.

Piney Ridge Associates v. Ellington, 2017 IL App (3d) 160764-U reads like a first year contracts “hypo” come to life as it reflects the perils of creditor’s accepting partial payments where the payor recites “payment in full” on a check.

Piney Ridge’s plaintiff note buyer sued the defendant for defaulting on a 1993 promissory note. The defendant moved to dismiss because he wrote “payment in full” under the check endorsement line. The trial court agreed with the defendant that plaintiff’s acceptance of the check was an accord and satisfaction that defeated plaintiff’s suit.

The 3rd District appeals court reversed; it stressed that a debtor’s duplicitous conduct won’t support an accord and satisfaction defense.

Under Illinois law, an accord and satisfaction is a contractual method of discharging a debt: the accord is the parties’ agreement; the satisfaction is the execution of the agreement.

In deciding whether a transaction amounts to an accord and satisfaction, the court focuses on the parties’ intent.

Article 3 of the Uniform Commercial Code (which applies to negotiable instruments) a debtor who relies on the accord and satisfaction defense must prove (1) he/she tendered payment in good faith as full satisfaction of a claim, (2) the amount of the claim was unliquidated or subject to a bona fide dispute; and (3) the claimant obtained payment from the debtor. 810 ILCS 5/3-311(a).

Good faith means honesty in fact and observing “reasonable commercial standards of fair dealing.” The debtor must also provide the creditor with a conspicuous statement that the debtor’s payment is tendered in full satisfaction of a claim. (⁋12)(810 ILCS 5/3-311(a), (b)). Without an honest dispute, there is no accord and satisfaction. (⁋ 14)

A debtor who fails to act in good faith cannot bind a creditor to an accord and satisfaction. Case examples of a court refusing to find an accord and satisfaction include defendants who, despite clearly marking their payment as “in full”, paid less than 10% of a workers’ compensation lien in one case, and in another, paid less than half the plaintiff’s total invoice amount and lied to the plaintiff’s agent about past payments. (⁋⁋ 13, 14)(citing to Fremarek v. John Hancock Mutual Life Ins. Co., 272 Ill.App.3d 1067 (1995); and McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1307 (7th Cir. 1996).

Applying this good faith requirement, the Court noted that the defendant paid $354 to the plaintiff at the time the defendant admittedly owed over $10,000 (defendant sent a pre-suit letter to the prior noteholder conceding he owed $10,000 on the note). The Court held that this approximately $7,600 shortfall clearly did not meet accord and satisfaction’s good faith component.

Bullet-points:

  • Accord and satisfaction requires good faith on the payor’s part and a court won’t validate debtor subterfuge.
  • Where the amount paid “in full” is dwarfed by the uncontested claim amount, the Court won’t find an accord and satisfaction.
  • Where there is no legitimate dispute concerning a debt’s existence and amount, there can be no accord and satisfaction.

 

 

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.