One Man’s ‘Outrage’ Is Another’s Petty Annoyance: Federal Court Tackles Promissory Fraud and Intentional Infliction Tort in Law Firm-Associate Spat

img_2052-3An Illinois Federal court expands on the contours of the IWPCA, promissory fraud, the employee vs. independent contractor dichotomy and the intentional infliction of emotional distress (IIED) tort in Lane Legal Services v. Le Brocq, 2016 WL 5955536,

The plaintiff law firm (“Firm”) sued a former associate (“Associate”) when he left to open his own law shop.  The Firm claimed the Associate stole firm business records, hacked into Firm computers and breached a written employment agreement.  The Associate fired back with multiple counterclaims against the Firm including ones for unpaid compensation under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq., fraud, and IIED.

IWPCA Claim

The Court denied the Firm’s motion to dismiss the Associate’s IWPCA count.  The IWPCA requires an employer to pay final compensation to a separated employee no later than the next regularly scheduled payday.  Independent contractors, in contrast to employees, aren’t covered by the IWPCA.

The key question when deciding whether someone is an employee or an independent contractor is the level of control exerted over the plaintiff.  The more autonomy a plaintiff has in performing his job functions, the more likely he is deemed an independent contractor and not subject to the IWPCA.

Associate attorneys are generally considered employees under the IWPCA.  While the Associate here had a unique relationship with the Firm in the sense he was entitled to a share of the Firm’s fees, the Court ultimately found the Associate was an employee under the statute as the Firm could still dictate the details of the Associate’s legal work. 

‘Promissory’ Fraud

The Court found the Associate alleged enough facts for his fraud counterclaim to survive the Firm’s motion to dismiss.  In Illinois, a common law plaintiff must plead (1) a false statement of material fact, (2) knowledge or belief by the speaker that a statement is false, (3) intent to induce the plaintiff to act, (4) action by the plaintiff in reliance on the statement, and (5) damages.

Where fraud is predicated on forward-looking/future statements, the claim is a non-actionable “promissory fraud.”  An exception to this rule lies where the fraudulent conduct is part of a scheme to defraud – an exception that governs where there is a pattern of deceptive conduct by a defendant.  As few as two broken promises can amount to a scheme of defraud although that is not the norm. (**6-7).

The court found that the Associate’s allegations that the firm falsely stated it supported him “leaving the nest” and starting his own firm knowing it would later retaliate against him for doing so was factual enough to beat the Firm’s motion to dismiss.

Intentional Infliction of Emotional Distress (IIED)

The Court dismissed the associate’s intentional infliction claims finding that the Firm’s conduct, while possibly vindictive, still wasn’t objectively extreme and outrageous enough to sustain an IIED action.

An IIED plaintiff must show: (1) extreme and outrageous conduct, (2) the defendant’s intent to inflict severe emotional distress or knowledge that there was a high probability his conduct would inflict such distress, and (3) the conduct caused severe emotional distress.  Whether conduct rises to the level of extreme and outrageous is judged on an objective standard based on the facts of a given case and must be more than insults, threats, indignities, annoyances or petty trivialities.  To be actionable, the conduct must be “unendurable by a reasonable person.”

Illinois courts especially disfavor applying the IIED tort to employment settings since nearly every employee could conceivably have a claim based on everyday work stressors.

The Court found that the Firm’s challenged actions – filing a frivolous suit and bad-mouthing the associate to regulatory bodies – while inappropriate and bothersome, didn’t amount to extreme and outrageous conduct that would be unbearable to a reasonable person.  As a result, the Court dismissed the associate’s IIED claim.

Take-aways:

(1) A plaintiff can qualify as an employee under the IWPCA even where he shares in company profits and performs some management functions.  If the employer sufficiently controls the manner and method of plaintiff’s work, he likely meets the employee test;

(2) While promissory fraud normally is not actionable, if the alleged fraud is part of a pattern of misstatements, a plaintiff may have a viable fraud claim – even where there is as few as two broken promises;

(3) A colorable intentional infliction claim requires a showing of extreme and outrageous conduct that go beyond harsh business tactics or retaliatory conduct.  If the conduct doesn’t demonstrate an overt intention to cause mental anguish, it won’t meet the objective outrage standard.

 

Substantial Performance of Asset Purchase Agreement Wins the Day in Pancake House Spat

pancakes-155793_960_720The Second District affirmed summary judgment for the plaintiff pancake house (“Restaurant”) seller in a breach of contract action against the Restaurant’s buyer and current operator.  Siding with the seller, the court discussed the contours of the substantial performance doctrine and what kind of evidence a plaintiff must supply to win summary judgment in a contract dispute.

The plaintiff in El and Be, Inc. v. Husain, 2016 IL App (2d) 150011-U, sold the Restaurant for about $500K pursuant to an Asset Purchase Agreement (APA).   The defendant failed to pay the agreed purchase price when it learned the plaintiff had several unpaid vendor bills, utility debts and a lien lawsuit was filed in Texas against Restaurant equipment by a secured creditor of the plaintiff.  The plaintiff sued for breach of contract to recover the APA purchase price and the defendant counterclaimed for fraud and breach of the APA.  The trial court entered summary judgment for the plaintiff on its claims as well as defendants’ counterclaims.

Affirming summary judgment for the plaintiff, the Second District framed the salient issue as whether the plaintiff substantially performed its APA obligations.

Perfect performance isn’t required to enforce a contract.  Instead, a plaintiff must show he substantially performed.  Substantial performance is hard to define and is a fact-based inquiry.  In deciding whether substantial performance has occurred, a court considers whether a defendant received and enjoyed the benefits of the plaintiff’s performance.  Substantial performance allows a plaintiff to win a breach of contract suit; especially where his performance is done in reliance on the parties’ contract.

The court found that the defendant Restaurant buyer clearly benefitted from the plaintiff’s performance.  The buyer gained the Restaurant assets and goodwill and operated the Restaurant continuously for over a year before plaintiff sued to enforce the APA.  The defendant’s operation of the Restaurant during this pre-suit period was a tangible benefit flowing to the defendant from the plaintiff’s APA performance.  (¶¶ 25-27).

Next, the Court rejected the defendant’s fraud counterclaim – premised on plaintiff’s failure to disclose outstanding debts prior to the Restaurant sale.  The defendant claimed this omission exposed the defendant to a future lien foreclosure action and a possible money judgment by plaintiff’s creditors.

In Illinois, a fraud plaintiff must establish (1) a false statement of material fact, (2) the statement maker’s knowledge or belief that the statement was false; (3) an intention to induce the plaintiff to act based on the statement, (4) reasonable reliance on the truth of the statement by the plaintiff, and (5) damage to the plaintiff resulting from the reliance.  A fraud claimant must also prove damages (monetary loss, e.g.) with reasonable certainty.  While mathematical precision isn’t required, fraud damages that are speculative or hypothetical won’t support a fraud suit.

Here, since the defendant made only generalized allegations of possible damages and could not point to actual damages evidence – such as having to defend a lien foreclosure suit or a money judgment – the fraud claim failed.  On summary judgment, a litigant must offer evidence to support its claims.  The defendant’s failure to produce measurable damages evidence stemming from plaintiff’s pre-sale omissions doomed the fraud claim.  (¶¶ 33-36)

Afterwords:

El and Be, Inc. cements the proposition that perfect performance isn’t required to enforce a contract.  Instead, a breach of contract plaintiff must show substantial performance – that he performed to such a level that the defendant enjoyed tangible benefits from the performance.  Where a contract defendant clearly reaps monetary awards from a plaintiff’s contractual duties, the substantial performance standard is met.

The case also makes clear that fraud must be pled and proven with acute specificity and that vague assertions of damages without factual back-up won’t survive summary judgment.

 

Election of Remedies vs. Alternative Pleading In Illinois

The election of remedies doctrine clashes with Illinois alternative pleading rules in Evashank v. Miller Brewing Company, 2013 IL App (1st) 112987-U, a case involving a dispute over a misread beer promotional ticket.

The plaintiff was given a promotional sticker at the Coach’s Corner bar that plaintiff thought read “win a million dollars”.  It actually said “this summer I want to win a million dollars.”  When the plaintiff tried to claim his big bucks prize, the bar and promotional staff said no and plaintiff sued the beer company and promotional group for fraud and breach of contract. 

Before trial, the court made the plaintiff to choose whether he was going to pursue his fraud or breach of contract claims against the bar.  Plaintiff chose the latter.  The court found for the tavern and plaintiff appealed.

Result: Reversed in part.

Election of Remedies

The election of remedies doctrine applies where a plaintiff elects inconsistent remedies for the same injury.  The rule provides that the prosecution of one remedy to judgment bars a second action stemming from the same transaction based on an inconsistent theory.  The prototypical example: a plaintiff can’t seek to recover breach of contract damages while at the same time  (or later) try to rescind that same contract.  The remedies are inconsistent.

Illinois courts confine the election of remedies rule to situations where (1) double compensation for the plaintiff is threatened, (2) defendant has been misled by the plaintiff’s conduct in choosing one remedy over another, or (3) where res judicata applies (final judgment on the merits, same parties, same cause of action). 

The election of remedies rule bars a plaintiff from recovering on one theory in a case and then later seeking a different remedy in a second case based on the same facts (as the first case). ¶¶ 50-51

But Illinois law does permit alternative pleading.  Code Sections 2-604 and 2-613 allow a plaintiff to plead inconsistent theories of recovery and allege contradictory facts at the pleading stage.  A plaintiff can also go to trial on inconsistent claims (e.g. fraud and breach of contract).  The proofs at that trial will determine which theory, if any, the plaintiff can recover on.  ¶¶47-49.

Here, there was only one case.  Plaintiff didn’t try to first recover on fraud and then, in a second action, try to recover for breach of contract.  While fraud and breach of contract have different pleading and proof elements and proving one (breach of contract) normally prevents proof of the other (fraud), a plaintiff can still proceed to trial on both legal theories; he just can’t recover damages on both. 

Since plaintiff should have been allowed to take both his breach of contract and fraud counts to trial, the trial court mistakenly made plaintiff choose his remedy at the pre-trial stage.  And while the First District viewed the plaintiff’s fraud claim as weak, it still reversed the dismissal of that count because the trial court misapplied the election of remedies rule.

The Breach of Contract Claim

The trial court properly directed verdict against plaintiff on the breach of contract count.  There was no meeting of the minds or consideration.  The plaintiff admitted he paid nothing for the “million dollar sticker” and had no expectation of winning a million dollars when he visited the bar.  This precluded a finding that there was an enforceable agreement.  The sticker was misread; plain and simple.  There was no enforceable contract.  ¶¶ 49-52.

Afterwords:

A case that features a deep analysis of some finer procedural points in a “fun” fact pattern.  Some key take-aways include:

1/ An absence of a meeting of minds will prevent enforcement of a contract; especially in the promotional setting;

2/ An advertisement or promotional “offer” is generally construed as an invitation to make an offer – not an offer that invites acceptance.

3/ While Illinois permits alternative pleading, it doesn’t allow recovery on inconsistent remedies (e.g. a plaintiff can’t recover for breach of contract while at same time seek rescission of the contract.);

4/ A plaintiff can’t recover for both fraud and breach of contract (he must choose one or the other), but he doesn’t have to make this choice until after trial.