ReMax Franchisor Defeats Tortious Interference Claim With Privilege Defense – IL 4th Dist.

The plaintiffs in Byram v. Danner, 2018 IL App (4th) 170058-U, sued after their planned purchase of a Remax real estate franchise imploded.  The plaintiffs missed an installment payment and the defendants responded by cancelling the agreement. Plaintiffs then filed a flurry of tort claims including fraud and tortious interference with contract.

Plaintiffs’ fraud count alleged the defendants lacked Remax authority to sell the franchise and hid this fact from the plaintiffs. The tortious interference claim asserted defendants bad-mouthed plaintiffs to certain agents, causing them to disassociate from plaintiffs.

The plaintiffs sought to recover their franchise fee, their first installment payment and unpaid commissions earned over a 16-month period. The trial court dismissed all of plaintiffs’ claims under Code Sections 2-615 and 2-619.  Plaintiffs appealed.

In finding the trial court properly jettisoned the fraud claim, the court noted that a valid cause of action for fraud requires (1) a false representation of material fact, (2) by a party who knows or believes it to be false, (3) with the intent to induce the plaintiff to act, (4) action by the plaintiff in reliance on the statement, and (5) injury to the plaintiff as a consequence of the reliance.

However, where a contractual provision negates one of the fraud elements, the fraud claim fails. Here, the underlying contract expressly conditioned defendants’ sale of the franchise on Remax accepting plaintiffs as a franchisee. This qualified language precluded plaintiffs from alleging that defendants misrepresented that they had authority from Remax to sell their franchise. (⁋ 43)

The appeals court also affirmed the trial court’s dismissal of plaintiffs’ tortious interference with prospective economic advantage claim.  To prevail on this theory, a plaintiff must plead and prove (1) his reasonable expectation of entering into a valid business relationship, (2) the defendant’s knowledge of the plaintiff’s expectancy, (3) purposeful interference by defendant that prevents plaintiff’s legitimate expectation from coming to fruition, and (4) damages to the plaintiff.

The ‘purposeful interference’ prong of the tort requires a showing of more than interference.  The plaintiff must also prove a defendant’s improper conduct done primarily to injure the plaintiff.  Where a defendant acts to protect or enhance his own business interests, he is privileged to act in a way that may collaterally harm another’s business expectancy.  Where a defendant invokes a privilege to interfere with a plaintiff’s business expectancy, the burden shifts to the plaintiff to show that the defendant’s conduct was unjustified or malicious.  (¶ 46)

The Court found defendants’ actions were done to protect the future success of their real estate franchise and listings.  Since plaintiffs failed to plead any specific facts showing defendants’ intent to financially harm the plaintiffs, dismissal of the tortious interference count was proper.

The Court reversed the dismissal of plaintiff’s breach of contract claims, however. This was because the affidavit filed in support of defendant’s Section 2-619 motion didn’t qualify as affirmative matter.  An affirmative matter is any defense other than a negation of the essential allegations of the plaintiff’s cause of action.  Affirmative matter is not evidence a defendant expects to contest an ultimate fact alleged in a complaint.

Here, defendants’ Section 2-619 affidavit effectively plaintiffs’ allegations were “not true:” that defendants didn’t owe plaintiffs any commissions.  The Court found that a motion affidavit that simply denies a complaint’s material facts does not constitute affirmative matter. (¶¶ 56-59)

Afterwords:

Byram provides a useful summary of the relevant guideposts and distinctions between section 2-615 and 2-619 motions to dismiss. Where a supporting affidavit merely disputes plaintiff’s factual allegations, it will equate to a denial of the plaintiff’s allegations. Such an affidavit will not constitute proper affirmative matter than wholly defeats a claim.

The case also provides value for its discussion of the Darwinian privilege defense to tortious interference. When a defendant acts to protect herself or her business, she can likely withstand a tortious interference claim by a competitor – even where that competitor is deprived of a remedy.

Commercial Borrowers’ Civil RICO Suit For Inflated Appraisals and Loans Bounced by IL Fed Court

 

Delaware Motel Associates v. Capital Crossing Servicing Company, LLC, 2017 WL 4224618 examines the pleading requisites for civil RICO claims and the razor-thin difference between unjust enrichment and quantum meruit claims in a hotel development loan dispute.

The plaintiff real estate investors sued a lender and its appraisal firm for civil RICO violations.  The plaintiffs alleged the appraiser and lender plotted to issue fraudulent loans based on inflated property values over a multi-year span.  The Northern District of Illinois granted Defendants’ motion to dismiss the claims under Rule 12(b)(6).

Reasons:

To state a cognizable RICO claim, a plaintiff must plead (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity. To satisfy the enterprise element – item (2) – the plaintiff has to allege “a group of persons acting together for a common purpose or course of conduct.” Here, the plaintiffs’ complaint was devoid of specific allegations that defendants worked together to advance a common objective and lacked any facts showing defendants’ common purpose.

The plaintiffs also failed to adequately allege defendants engaged in racketeering activity. Quintessential RICO conduct includes mail and wire fraud, bank fraud, extortion and money laundering. 18 U.S.C. § 1961(1). Because of their inherently fraudulent make-up, these predicate acts must be pled with acute specificity under Rule 9(b).

To satisfy Rule 9(b)’s heightened pleading standard, the civil RICO plaintiff must allege the time, place, and content of the alleged fraud.  While Federal pleading rules sometimes allow fraud to be pled “on information and belief,” the plaintiff still must supply “some firsthand information to provide grounds to corroborate their suspicions.”  The Court found the plaintiff’s mail, wire and bank fraud allegations sparse since they didn’t identify a specific fraudulent loan or inflated land appraisal.

The Court also dispatched with the plaintiffs’ intentional interference with prospective economic advantage claim.  This requires a plaintiff to allege: (1) he had a reasonable expectancy of a valid business relationship; (2) the defendant knew about the expectancy; (3) the defendant intentionally interfered with the expectancy and prevented it from ripening into a valid business relationship; and (4) the intentional interference injured the plaintiff.

In their Complaint, plaintiffs failed to allege any defendant who knew of plaintiff’s reasonable expectancy of a valid business relationship who purposefully tampered with the expectancy.

Rejecting plaintiffs’ unjust enrichment and quantum meruit claims, the court again focused on plaintiffs’ pleading deficits.  The plaintiffs failed to allege the critical unjust enrichment element that plaintiff conferred a benefit on defendants which they unfairly kept.  The plaintiffs similarly failed to plead quantum meruit as the Complaint was missing allegations that plaintiff performed a service that benefitted defendants.

Useful Bullet-Points

– This case provides a useful pleadings primer for civil RICO cases and emphasizes the paramount importance of factual specificity in fraud-based claims.  To allege a RICO enterprise, the plaintiff must allege concerted actions by a group of people to pursue a common goal.

– A viable racketeering claim sounding in mail or wire fraud requires specific factual allegations.  Otherwise, the RICO claim can be subject to Rule 12(b)(6) dismissal.

 

Discovery Rule Can’t Save Trustee’s Fraud Suit – No ‘Continuing’ Violation Where Insurance Rep Misstates Premium Amount – IL Court

Gensberg v. Guardian, 2017 IL App (1st) 153443-U, examines the discovery rule in the context of common law and consumer fraud as well as when the “continuing wrong” doctrine can extend a statute of limitations.

Plaintiffs bought life insurance from agent in 1991 based in part on the agent’s representation that premiums would “vanish” in 2003 (for a description of vanishing premiums scenario, see here).  When the premium bills didn’t stop in 2003, plaintiff complained and the agent informed it that premiums would cease in 2006.

Plaintiff complained again in 2006 when it continued receiving premium bills.  This time, the agent informed plaintiff the premium end date would be 2013. It was also in this 2006 conversation that the agent, for the first time, informed plaintiff that whether premiums would vanish is dependent on the policy dividend interest rate remaining constant.

When the premiums still hadn’t stopped by 2013, plaintiff had seen (or heard enough) and sued the next year.  In its common law and consumer fraud counts, plaintiff alleged it was defrauded by the insurance agent and lured into paying premiums for multiple years as a result of the agent’s misstatements.

The Court dismissed the plaintiffs’ suit on the grounds that plaintiff’s fraud claims were time barred under the five-year and three-year statutes of limitation for common law and statutory fraud.

Held: Dismissal Affirmed.

Rules/reasons:

The statute of limitations for common law fraud and consumer fraud is five years and three years, respectively. 735 ILCS 5/13-205, 805 ILCS 505/10a(e). Here, plaintiff sued in 2014.  So normally, its fraud claims had to have accrued in 2009 (common law fraud) and 2011 (consumer fraud) at the earliest for the claims to be timely.  But the plaintiff claimed it didn’t learn it was injured until 2013 under the discovery rule.

The discovery rule, which can forestall the start of the limitations period, posits that the statute doesn’t begin to run until a party knows or reasonably should know (1) of an injury and that (2) the injury was wrongfully caused. ‘Wrongfully caused’ under the discovery rule means there is enough facts for a reasonable person would be put on inquiry notice that he/she may have a cause of action. The party relying on the discovery rule to file suit after a statute of limitations runs has the burden of proving the date of discovery. (¶ 23)

The plaintiff alleged that it wasn’t until 2013 that it first learned that defendant misrepresented the vanishing date for the insurance premiums.
The Court rejected this argument based on the allegations of the plaintiff’s complaint. It held that the plaintiff knew or should have known it was injured no later than 2006 when the agent failed to adhere to his second promised deadline (the first was in 2003 – the original premium end date) for premiums to cease.

Plaintiff stated it complained to the insurance agent in 2003 and again in 2006 that it shouldn’t be continuing to get billed.  The court found that the agent’s failure to comply with multiple promised deadlines for premiums to stop should have put plaintiff on notice that he was injured in 2003 at the earliest and 2006 at the latest. Since plaintiff didn’t sue until 2014 – eight years later – both fraud claims were filed too late.

Grasping at a proverbial straw, the plaintiff argued its suit was saved by the “continuing violation” rule.  This rule can revive a time-barred claim where a tort involves repeated harmful behavior.  In such a case, the statute of limitations doesn’t run until (1) the date of the last injury or (2) when the harmful acts stop. But, where there is a single overt act which happens to spawn repetitive damages, the limitations period is measured from the date of the overt act. (¶ 26).

The court in this case found there was but a single harmful event – the agent’s failure to disclose, until 2006, that whether premiums would ultimately vanish was contingent on dividend interest rates remaining static. As a result, plaintiff knew or should have known it was harmed in 2006 and could not take advantage of the continuing violation rule to lengthen its time to sue.

Take-aways:

1/ Fraud claims are subject to a five-year (common law fraud) and three-year (consumer fraud) limitations period;

2/ The discovery rule can extend the time to sue but will not apply where a reasonable person is put on inquiry notice that he may have suffered an actionable wrong;

3/  “Continuing wrong” doctrine doesn’t govern where there is a single harmful event that has ongoing ramifications. The plaintiff’s time to sue will be measured from the date of the tortious occurrence and not from when damages happen to end.