Tag: Economic Loss

Bank Customer’s Suit Versus Bank For Unauthorized On-Line Transfer Defeated by Economic Loss Rule

After a hacker accessed its on-line banking system and wired about $125,000 from its account, a healthcare firm sued its former (and now defunct) bank for breach of contract, negligence and breach of the implied duty of good faith and fair dealing.

The FDIC substituted in as defendant after it was appointed receiver of the closed bank and moved for summary judgment on all complaint counts.  The Northern District of Illinois in Envision Healthcare, Inc. v. FDIC, 2014 WL 6819991 (N.D.Ill. 2014) granted summary judgment in favor of the bank on all claims.

Reasons:

Two contracts governed the parties relationship, both of which required the bank to permit withdrawals based on recognized user ID and password credentials and allowed plaintiff’s authorized agents to initiate wire transfers from its account.  Other than verifying that the person requesting a withdrawal or wire transfer entered valid log-in data, the bank had no other obligations in either written agreement.

Rejecting the plaintiff’s breach of contract claim, the court noted that banks generally owe a duty of reasonable care to depositors. This duty arises from the position of trust banks occupy vis-a-vis their customers.  But in the context of lawsuits lodged by bank customers for unauthorized transfers, UCC Article 4A’s “Funds Transfers” section governs and sets out a detailed scheme of customer rights and remedies. 810 ILCS 5/4A.  In cases involving unauthorized withdrawals or funds transfers, this statute takes precedence over any common law obligations owed by a bank to its customer.

The court held that the plaintiff couldn’t show a breach of contract since all the bank was obligated to do was honor any request by someone who supplied recognized log-in data. Since the person requesting the funds transfer had a valid ID and password, and the contract terms didn’t saddle the bank with any additional duties, the plaintiff failed to establish the bank’s breach of contract.

Economic Loss Rule

The plaintiff’s negligence suit was defeated by the economic loss doctrine.  This rule posits that where a contract governs the relationship between the parties, the contract defines each side’s rights and responsibilities.  A plaintiff cannot recover in tort (i.e., in negligence) where a contract defines the parties’ relationship and the defendant fails to perform his contractual obligations. *6.

Here, the bank-customer relationship was controlled by the two written agreements.  In Illinois, the general rule is that a service provider is only responsible for physical harm (and not economic harm ) resulting from a breach of duty.

Since the bank defendant was a service provider, and the plaintiff’s damages were purely economic (the $125K unauthorized wire transfer), the economic loss rule barred plaintiff’s negligence claim. *6.

Another reason the court ruled for the bank on the negligence count was because UCC Article 4A (810 ILCS 5/4A) pre-empted or displaced plaintiff’s negligence count.  This Section sets forth in detail a bank’s obligations and a customer’s remedies for honoring an unauthorized payment order. Since the plaintiff didn’t premise its claims under this UCC section, its negligence claim was pre-empted.

Duty of Good Faith and Fair Dealing

The bank also defeated plaintiff’s ‘good faith and fair dealing count. The duty of good faith and fair dealing is implied in every Illinois contract and requires a party who has “contractual discretion” to exercise that discretion reasonably, and not arbitrarily.

The duty does not give rise to a stand-alone cause of action, though. Instead, it’s an interpretive tool employed by the court when assessing the validity of a breach of contract clam.  Any reference to the duty of good faith and fair dealing should be alleged as part of a broader breach of contract claim – not a separate cause of action.

In this case, since the plaintiff failed to incorporate its good faith and fair dealing claims into its breach of contract count, the claim failed as a matter of law.

The Court also noted that the bank didn’t have broad “discretion” in deciding whether to honor a funds transfer.  The bank had to honor a transfer request so long as it was made by someone with a valid log-in and password.

Since the bank didn’t have the option of refusing a bank customer’s payment request, it lacked contractual discretion and the good faith and fair dealing duty claim failed. **8-9.

Take-aways:

– The bank-customer contract will govern the parties’ relationship;

– A service provider (like a bank) owes no extra-contractual duty (a duty that’s not spelled out in the document) to its customer absent physical damage to a customer or his property;

– A plaintiff suing his bank for unauthorized wire transfers should couch his complaint in the language of UCC Section 4A to have the best prospects for recovery.

 

 

 

 

 

 

Information-Technology Firm Not An ‘Information’ Provider Under Negligent Misrepresentation Economic Loss Exception (ND IL)

computer crashPublications International Limited v. Mindtree Limited, 2014 WL 3687316 (N.D.Ill. 2014) looks at whether a Web site developer is financially responsible for  a customer’s multiple system crashes.

The plaintiff on-line consumer products reviewer sued the defendant information-technology firm after the plaintiff’s site kept malfunctioning.  The plaintiff sued for breach of the parties’ written consulting agreement and joined claims for wilfull and wanton conduct and fraudulent concealment. 

The plaintiff alleged that defendant’s negligence in installing and maintaining the site resulted in decreased customer traffic resulting in lost revenue.  The defendant moved to dismiss all claims except for the breach of contract count.  

Result: Motion granted. 

Reasons:

The Court rejected plaintiff’s breach of warranty claim failed because it was premised on a warranty – to comply with the standard of care of an experienced IT company – that didn’t exist in the parties’ contract. 

In Illinois, an express warranty is contractual in nature and the specific warranty text will govern the parties rights and duties.  Here, the consulting contract contained broad disclaimers of express and implied warranties as well as an integration clause. 

Illinois courts enforce warranty disclaimers as long as they’re conspicuous (e.g. bold, ALLCAPS language) and integration clauses are routinely applied to prevent contracting parties from trying to change a contract’s clear wording by citing prior oral statements related to the contract’s subject matter. (**2-3).

The Court struck the plaintiff’s negligence and willful and wanton counts based on the economic loss rule.   The economic-loss doctrine prevents a party from suing in tort to recover economic damages that are based on a breach of contract. 

So, if a contract involving a defective product exists, and the plaintiff alleges that the product defect caused disappointed commercial expectations, the plaintiff’s remedy lies in breach of contract; not in negligence or in another tort theory.

The Court found that the a contract clearly governed the parties’ relationship and the plaintiff’s claimed damages to its on-line presence, goodwill,  reputation and its brand were purely intangible and economic in nature. 

An exception to the economic loss rule involves an action alleging negligent misrepresentation.  This exception applies where a defendant is “in the business of supplying information for the guidance of others in their business transactions.”  Other economic loss exceptions include the fraud and sudden and dangerous occurrence exceptions.

Here, the negligent misrepresentation exception didn’t apply.  The defendant was hired to provide a product (software) and services (tech assistance) – not information (this in spite of the ironic “information-technology” title).  

Since the contract’s primary purpose was for the defendant to supply  software and technical services to the plaintiff, the negligent misrepresentation exception wasn’t triggered.  Any information provided by the defendant was purely tangential or “secondary” to the main purpose of the contract.

The Court also nixed the plaintiff’s “extra-contractual” duty argument: that defendant owed a duty of care outside the scope of the written contract.  The only situations that an extra-contractual duty applies are in professional malpractice suits (e.g., a legal malpractice case) where the defendant owes a fiduciary duty to a comparatively vulnerable plaintiff. 

The Court noted that there was no case-sanctioned practice or custom of allowing professional malpractice claims against IT developers and no law that saddled them with fiduciary duties to their customers.

 Afterwords:

– Warranty disclaimers are valid and enforced so long as they’re clear and conspicuous;

– The economic loss rule bars tort claims against a defendant who provides a mix of goods and information if the information is secondary to the supplier of goods or services.

 

Illinois Consumer Fraud Act Applies To ‘Biz to Biz’ Insurance Dispute Says Fed. Court

In GoHealth, LLC v. Zoom Health, Inc., 2013 WL 6183024, the Northern District provides a detailed summary of the necessary Illinois pleading elements of some signature business torts in a diversity contract dispute involving the sale of insurance products.

Plaintiff and defendants entered into a written agreement where plaintiff would sell insurance product leads to defendants for a fee.  The defendants would in turn use the leads in peddling insurance products to its own customers.  The relationship soured and each side filed claims against each other.  Defendant’s counterclaims sounded in consumer fraud and common law fraud. Each side moved to dismiss.

The Court struck defendants’ fraud and negligent misrepresentation claims and upheld its consumer fraud and trade secrets counts.

Fraud Claim and Negligent Misrepresentation Claims

The Court dismissed the defendants’ common law fraud  and negligent misrepresentation claims.  An Illinois fraud plaintiff must allege a (i) knowingly false statement, (ii) intended to induce reliance in the plaintiff, (iii) reliance by the plaintiff and (iv) damages resulting from the reliance.

Negligent misrepresentation has the same elements as fraud except the plaintiff must allege a negligent or reckless (instead of intentional) false statement.  Federal specificity-in-pleading rules under Rule 9(b) don’t apply to a negligent misrepresentation claim. *9-10.

Defendants’ fraud count asserted that plaintiff falsely inflated defendants commission and renewal rates and misstated some sales projections.

The Court found that these two statements non-actionable as they involved future events (e.g. future sales and commissions projections).  Statements of future intent, opinions or of financial projections don’t equal fraud under the law.

The Court also rejected defendants’ argument that plaintiff was in business of providing information for the guidance of others in their business dealings – a key exception to the economic loss rule (this rule posits that you can’t recover in tort where a contract governs the parties’ relationship.)

The Court held that plaintiff was contractually obligated to provide sales leads and nothing else.  It wasn’t hired to provide sales projections or renewal forecasts – the bases for defendants’ fraud and negligent misrepresentation claims.  Any information provided by plaintiff in connection with the leads was peripheral to the contract’s core purpose.  *11.

Consumer Fraud Claims – Allowed

The court sustained defendants’ consumer fraud counterclaim. 815 ILCS 505/1 (the “Act”).  The consumer fraud count was based on plaintiff furnishing over 40,000 bogus and recycled sales leads to defendant instead of fresh leads.

Allowing the claim, the Court broadly construed the Act to encompass business-to-business relationships: “the protections of the Act are not limited to consumers”, but applies broadly to “persons”, including businesses. *12.

The court found the defendant was a “consumer” of plaintiff’s sales leads which constituted intangible property under the Act. (The Act applies to intangible property.)

The defendants’ claim that plaintiff supplied a high volume of duplicate leads also stated a deceptive act under the Act.   *12.

Afterword:

This case is post-worthy for its application of the consumer fraud statute to a purely business-to-business setting and its discussion of what constitutes “information” in the context of a negligent misrepresentation claim that will beat an economic loss rule challenge.