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.

 

Shareholder Oppression: A Frustrated Mess?

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Yikes! That was a bad one.  But there is your James Marshall Hendrix reference for the day.

Shareholder oppression is another easy-to-say, hard-to-apply legal standard that can trigger the break-up of a closely held corporation.  Broadly, it applies where a dominant shareholder squeezes out or excludes a minority shareholder from having a say in the corporation’s business.

Iversen v. C.J.C. Auto Parts and Tires, Inc., 2014 IL App (2d) 130706-U gives some content to shareholder oppression as a remedy for an aggrieved stockholder.

The plaintiff, a 20% shareholder in a Chicago auto parts company, sued the other shareholders and the company after the defendants refused to buy the plaintiff’s shares or accept plaintiff’s offer to sell his shares to an outside buyer.

The plaintiff claimed the defendants ganged up on him to dilute his shares and prevent his retirement. The plaintiff sued the corporation and individual shareholders for oppression under the Illinois corporation statute, and brought civil conspiracy and breach of fiduciary claims.  The trial court dismissed all of the plaintiff’s claims.

Result: Dismissal affirmed.

Reasons:

The plaintiff failed to allege oppressive conduct under the law.  Section 12.56(a)(3) of the Business Corporation Act – 805 ILCS 5/12.56(a)(3) (the “BCA”)- gives a minority shareholder in a close corporation a remedy against directors that act oppressively, illegally or fraudulently with respect to the other shareholders.

 The BCA doesn’t define oppression.  

Courts interpret oppression to mean “arbitrary, overbearing and heavy-handed” conduct.  Examples of shareholder oppression include a corporate officer using a corporation for his own benefit to the exclusion of other stockholders, failing to follow corporate formalities, flouting by-laws freezing out minority stockholders.  (¶¶ 27-30).

The plaintiff here failed to allege defendants’ self-dealing, violation of corporate by-laws, mismanagement or waste of corporate assets. The defendants refusal to accede to plaintiff’s buy-out request didn’t equal  oppression since the shareholder agreement didn’t require a buy-out or the approval of plaintiff’s share sales attempts.  (¶¶ 34, 39).

The plaintiff’s conspiracy claim also failed.  Civil conspiracy requires both (a) an independent tort – underlying wrongful conduct, and (b) an agreement between the defendants to carry out the wrongful conduct.  Without a predicate tort, there can be no conspiracy. 

The plaintiff’s conspiracy claim against the corporate defendant failed because a corporation can only act through its agents.  And by definition, a corporation can’t conspire with itself. (¶¶ 40-41).

Comments:

This case illustrates the importance of choosing the right remedy.  In hindsight, I would have added a specific performance claim to require the defendants to adhere to the agreement’s buyout and share appraisal provisions.

The case’s practice tip value lies in its punctuating how important it is to thoroughly vet a shareholder agreement before investing.  With no specific terms in the shareholder contract obligating defendants to buy back plaintiff’s shares or to not squelch plaintiff’s sale attempts, the plaintiff was basically at the defendants’ mercy.

On the pleading front, it’s clear that a colorable oppression claim under the BCA requires allegations of a corporate officer’s self-dealing, exclusionary conduct, corporate mismanagement or a failure to follow by-laws.  Also, a valid conspiracy claim must be factually detailed to survive summary judgment.