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.

 

 

Commercial Frustration and the Impossibility Defense: The Case of the Missing Bentley

Illinois agency rules, consumer fraud law and the commercial frustration doctrine are the focal points of Tahir v. DMI, 2014 WL 985351 (N.D. Ill. 2014), a case involving the purchase of an undelivered Bentley.

The plaintiff sued multiple car dealer defendants for breach of contract and consumer fraud after he paid over $100,000 for a car he never received.  The companies and individuals involved in the sale of the car operated a complex web of interconnected business entities that made it difficult to properly identify the selling defendants. 

The defendants all moved for summary judgment.

Result: Judgment for plaintiff on breach of contract claim against the dealership; Judgment for management company on plaintiff’s consumer fraud count.  

Basis/Reasoning:

The Court found for the plaintiff on its breach of contract claim versus the dealership based on Illinois agency principles governing liability to third parties. 

The test for agency is whether the principal can control the manner and method of the agent’s work such that the agent can affect the principal’s legal relationship.  (*5). 

Where a principal’s identity is disclosed to a third party, the disclosed principal is liable to the third party for a breach of contract while the agent is not.

Where an agent enters into a contract for an undisclosed principal, the agent is personally liable on the contract. 

Where a plaintiff gets a money judgment against an agent and an undisclosed principal, the plaintiff must choose which party to take the judgment against. (*5-6).

Here, both undisclosed and disclosed principal rules applied.  The dealership was managed by another entity under a written management agreement.  That agreement was cryptic concerning each parties’ duties in relation to the other. 

Based on the agreement’s wording, it was equally plausible that the car dealer controlled the manager and vice versa.

Because of this uncertainty, the Court found the dealer was liable under the car purchase contract as either a disclosed principal of the manager or as an agent for an undisclosed principal – also the manager.  Either way, plaintiff stated a breach of contract claim against the dealer. (*5).

The Court rejected the dealer defendant’s impossibility and commercial frustration defenses that blamed another dealer for not delivering the car. 

The impossibility defense applies where the (1) the impossibility was not and could not have been anticipated by the contracting parties, (2) the party claiming impossibility didn’t contribute to it, and (3) exhausted all possible alternatives to permit performance. 

Commercial frustration applies where (1) the frustrating  event wasn’t foreseeable and (2) the value of performance has been practically destroyed by the frustrating event.  (*6).  

Rejecting the defenses, the Court found that the manager’s default under the management agreement was clearly foreseeable as the agreement specified respective default and remedy provisions. 

The dealership also failed to show it exhausted all attempts at performance, such as by buying the car itself. The dealership offered no evidence that it lacked the resources to buy and deliver the car to the plaintiff. (*6).

The Court ruled against plaintiff on its consumer fraud claim against the manager.  An Illinois consumer fraud plaintiff must show (1) a deceptive act or practice, (2) defendant’s intent that the plaintiff rely on the deception, and (3) occurrence of the deception in trade or commerce.  (*8). 

The Court found that the plaintiff failed to demonstrate a deceptive act by the manager such as its intent to take plaintiff’s money without delivering the car.  At most, the Court ruled, the plaintiff alleged a breach of contract claim; not consumer fraud.  (*8).

Take-aways:

Many businesses operate through a byzantine web of corporate parents, subsidiaries, holding companies, trade names and “d/b/a”s (doing business as).  The plaintiff wisely named all possible entity permutations as defendants and let them sort out the responsible parties through motion practice.

The case also shows how difficult it is to prevail on an impossibility or commercial frustration defense – especially where the parties are sophisticated commercial entities.

Illinois Court Tackles Civil Conspiracy and Consumer Fraud in Interior Design Spat

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Carol Studios, Inc. v. Hong, 2013 IL App 122293-U (1st Dist.2013) provides a good summary of Illinois pleading requirements for consumer fraud, civil conspiracy and unjust enrichment in a construction contract dispute involving commercial property.  

Facts:

Over a span of two years, the owners of a mixed-use property in Skokie, Illinois hired the plaintiff interior design firm along with the defendants architect and general contractor to develop the site.  

At some point the architect and general contractor defendants (the “Defendants”) developed a mutual disdain for the plaintiff and started excluding plaintiff from the development and disparaging the plaintiff’s design services to the owners. 

When the owners fired it, the plaintiff sued.  The trial court dismissed plaintiff’s claims and plaintiff appealed.

Held: Affirmed.

Rules/Reasoning:

To allege civil civil conspiracy in Illinois, the plaintiff must plead: (1) an agreement between two or more persons, (2) to participate in an unlawful act, or a lawful act in an unlawful manner, (3) injury caused by the unlawful overt act performed by one of the parties; and (4) overt act was done in furtherance of a common scheme.

The essence of plaintiff’s conspiracy claim was that the Defendants ganged up on and conspired to block plaintiff from the project by denigrating the plaintiff’s services and telling the owners that Defendants could perform plaintiff’s interior design work better and cheaper. 

The Court found there was nothing inherently unlawful about this: defendants were free to express their work partner preference and to not work with the plaintiff. ¶¶ 23-26.

The Court also rejected plaintiff’s Consumer Fraud Act (the “CFA”) count based on Defendants’ misrepresenting their qualifications to the owners and false statements that they could do plaintiff’s design work for less money. 

In Illinois, a consumer fraud plaintiff must plead: (1) a deceptive act or practice; (2) defendant’s intent to induce plaintiff’s reliance on the deceptive act/practice, (3) occurrence of the deception in trade or commerce, and (4) actual damages to the plaintiff caused by the deception.  ¶¶ 28-29.

The Court narrowly construed the CFA and dismissed plaintiff’s claim.  The Court found that while the CFA can at times apply to business-to-business transactions, a garden-variety breach of contract claim doesn’t equate to consumer fraud.  ¶ 30

 And since the plaintiff’s core claim was that the owners breached the interior design contract, defendants’ freeze-out efforts against plaintiff didn’t have a sufficient connection to consumer protection concerns to bring plaintiff’s claims within the CFA’s coverage.  ¶¶ 27-31

Take-aways:

This case reaffirms that a basic breach of contract claim can’t be transmuted into a statutory consumer fraud claim.  Otherwise, all breach of contract claims would give rise to companion consumer fraud counts. 

Carol Studios also shows how difficult it is to prove civil conspiracy when all that’s really involved is a business dispute among different commercial parties. 

Note: the plaintiff in Carol Studios was permitted to amend its tortious interference with contract claims.