An Illinois appeals court recently affirmed a $700K money judgment for a gas station buyer in a fraud case against the seller.
The plaintiff gas station buyer in Benzakry v. Patel, 2017 IL App(3d) 160162 sued the seller when the station closed only a few months after the sale.
The plaintiff alleged he relied on the seller’s misrepresenting the financial health and trustworthiness of the station tenant which led the plaintiff to go forward with the station purchase. Plaintiff sued for common law and statutory fraud and sought to pierce the corporate veil of the LLC seller.
Affirming judgment for the plaintiff, the Third District discusses, among other things, the piercing the corporate veil remedy, the required evidentiary foundation for business records, the reliance element of fraud and the scope of the consumer fraud statute.
Piercing the Corporate Veil: Triable By Bench or Jury?
The jury pierced the seller LLC’s corporate veil and imposed liability on the lone LLC member.
The Court addressed this issue of first impression on appeal: whether a piercing the corporate veil claim is one for the court or jury. The Court noted a split in Federal authority on the point. In FMC v. Murphree, 632 F.2d 413 (5th Cir. 1980), the 5th Circuit held that a jury could hear a piercing claim while the 7th Circuit reached the opposite result (only a court can try a piercing action) in IFSC v. Chromas Technologies, 356 F.3d 731 (7th Cir. 2004).
The Court declined to follow either case since they applied only Federal procedural law (they were diversity cases). The Court instead looked to Illinois state substantive law for guidance.
Generally, there is no right to a jury trial in equitable claims and piercing the corporate veil is considered an equitable remedy. However, Code Section 2-1111 vests a court with discretion to direct any issue(s) involved in an equitable proceeding to be tried by a jury. The appeals court found that the trial court acted within its discretion in deciding that the piercing claim should be decided by a jury. (¶¶ 29-30)
Consumer fraud – Advertisement on Web = ‘Public Injury’
The Third District reversed the trial court’s directed verdict for the defendants on the plaintiff’s Consumer Fraud Act (CFA) count. Consumer fraud predicated on deceptive practices requires the plaintiff to prove (1) a deceptive act or practice by a defendant, (2) defendant’s intent that the plaintiff rely on the deception, (3) the occurrence of the deception during a course of conduct involving trade or commerce, (4) actual damage to the plaintiff, and (5) damage proximately caused by the deception.
The trial court sided with the defendant on this count since the plaintiff didn’t prove that defendants conduct resulted in injury to the public generally. CFA Section 10a (815 ILCS 505/10a) used to require a plaintiff to prove that a misrepresentation involved trade practice that addressed the market generally. However, a 1990 amendment to the Act changed that. The current version of the Act doesn’t require a plaintiff to show public injury except under limited circumstances.
Even so, the Court still held that the defendant’s misstating the gas station’s annual fuel and convenience store sales on a generally accessible website constituted a public injury under the CFA.
Going further, the Court construed the CFA broadly by pointing to the statutory inclusion of the works “trade” and “commerce.” This evinced the legislative intent to expand the CFA’s scope. Since defendant’s misrepresentations concerning the tenant were transmitted to the public via advertisements and to the plaintiff through e-mails, the Court viewed this as deceptive conduct involving trade or commerce under the CFA. (¶¶ 81-82)
Computer-Generated Business Records: Document Retention vs. Creation
While it ultimately didn’t matter (the business records were cumulative evidence that didn’t impact the judgment amount), the Court found that bank statements offered into evidence did not meet the test for admissibility under Illinois evidence rules.
The proponent of computer-generated business records must show (1) the equipment that created a document is recognized as standard, and (2) the computer entries were made in the regular course of business at or reasonably near the happening of the event recorded.
Showing “mere retention” of a document isn’t enough: the offering party must produce evidence of a document’s creation to satisfy the business records admissibility standard. Here, the plaintiff failed to offer foundational testimony concerning the creation of the seller’s bank statements and those statements shouldn’t have been admitted into evidence.
1/ The Court has discretion to order that an equitable piercing the corporate veil claim be tried to a jury;
2/ Inadequate capitalization, non-functioning shareholders and commingling of funds are badges of fraud or injustice sufficient to support a piercing the corporate veil remedy;
3/ Computer-generated business records proponent must offer foundational testimony of a document’s creation to get the records in over a hearsay objection;
4/ False advertising data on a public website can constitute a deceptive practice under the consumer fraud statute.