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.

 

LLC Stopped From Selling Member’s Residence In Violation of Prior Charging Order – Utah Federal Court

Q: Can A Court Stop An LLC That Pays the Monthly Mortgage of One of Its Members From Selling that Member’s Home Where A Charging Order Has Issued Against the LLC to Enforce a Money Judgment Against the LLC Member?

A: Yes.

Q2: How So?

A2: By selling the member’s property and paying off the member’s mortgage with the sale proceeds, the LLC is effectively “paying the member” to the exclusion of the plaintiff judgment creditor.

Source: Earthgrains Baking Companies, Inc. v. Sycamore Family Bakery, Inc., et al, USDC Utah 2015 (https://casetext.com/case/earthgrains-baking-cos-v-sycamore-family-bakery-inc-3)

In this case, the plaintiff won a multi-million dollar money judgment against a corporate and individual defendant in a trademark dispute.  The plaintiff then secured a charging order against a LLC of which the individual defendant was a 48% member.  When the LLC failed to respond to the charging order, the plaintiff moved for an order of contempt against the LLC and sought to stop the LLC from selling the defendant’s home.

The court granted the contempt motion.  First, the court found that it had jurisdiction over the LLC.  The LLC argued that Utah lacked jurisdiction over it since the LLC was formed in Nevada.  The LLC claimed that under the “internal affairs” doctrine, the state of the LLC’s formation – Nevada – governs legal matters concerning the LLC.

Disagreeing, the court noted that a LLC’s internal affairs are limited only to “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.”  The internal affairs doctrine does not apply to claims of third party creditors.  Here, since the plaintiff was a creditor of the LLC’s member, this was not a dispute between LLC and member.  As a result, the internal affairs rule didn’t apply and the Utah court had jurisdiction over the LLC since a LLC member lived in Utah.  (See Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998)).

The Charging Order required the LLC to pay any distribution that would normally go to the member directly to the plaintiff until the money judgment was satisfied.  The Charging Order specifically mentions transfers characterized or designated as payment for defendant’s “loans,” among other things.

The LLC was making monthly mortgage payments on the member’s home and listed the home for sale in the amount of $4M.  Plaintiff wanted to prevent the sale since there was a prior $2M mortgage on the home.

In blocking the sale, the court found that if the LLC sold the member’s home and paid off the member’s mortgage lender with the proceeds, this would violate the Charging Order since it would constitute an indirect payment to the member.  The court deemed any payoff of the member’s mortgage a “distribution” (a direct or indirect transfer of money or property from LLC to member) under the Utah’s LLC Act. (Utah Code Ann. § 48-2c-102(5)(a)).

Since the Charging Order provided that any loan payments involving the member were to be paid to the plaintiff until the judgment is satisfied, the court found that to allow the LLC to sell the property and disburse the proceeds to a third party (the lender) would harm the plaintiff in its ability to satisfy the judgment.

Afterwords:

An interesting case that discusses the intricacies of charging orders and the thorny questions that arise when trying to figure out where to sue an LLC that has contacts in several states.  The case portrays a court willing to give an expansive interpretation of what constitutes an indirect distribution from an LLC to its member. 

Earthgrains also reflects a court endeavoring to protect a creditor’s judgment rights where an LLC and its member appear to be engaging in misdirection (if not outright deception) in order to elude the creditor.

[A special thanks to attorney and Forbes contributor Jay Adkisson for alerting me to this case (http://www.forbes.com/sites/jayadkisson/)]

 

LLC That Pays Itself and Insiders to Exclusion of Creditor Plaintiff Violates Fraudulent Transfer Statute – Illinois Court

Applying Delaware corporate law, an Illinois appeals court in A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, reversed the dismissal of a contractor’s claim against a LLC and its sole member to enforce an out-of-state arbitration award.  In finding for the plaintiff contractor, the court considered some important and recurring questions concerning the level of protection LLCs provide a lone member and the reach of the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq. (“UFTA”), as it applies to commercial disputes.

The plaintiff sued  a Delaware LLC and its principal member, an Illinois LLC, to enforce a $450K Pennsylvania arbitration award against the Delaware LLC.  The plaintiff added UFTA and breach of fiduciary duty claims against the Delaware and Illinois LLCs based on pre-arbitration transfers made by the Delaware LLC of over $3M.

After a bench trial, the trial court ruled in favor of the LLC defendants and plaintiff appealed.

Reversing, the appeals court noted that the thrust of the UFTA claim was that the Delaware LLC enriched itself and its constituents when it wound down the company and paid itself and its member (the Illinois LLC) to the exclusion of plaintiff.

The UFTA was enacted to allow a creditor to defeat a debtor’s transfer of assets to which the creditor was entitled.  The UFTA has two separate schemes of liability: (1) actual fraud, a/k/a “fraud in fact” and (2) constructive fraud or “fraud in law” claims.  To prevail on an actual fraud claim, the plaintiff must prove a defendant’s intent to defraud, hinder or delay creditors.

By contrast, a constructive fraud UFTA claim doesn’t require proof of an intent to defraud.  Instead, the court looks to whether a transfer was made by a debtor for less than reasonably equivalent value leaving the debtor unable to pay any of its debts. (¶¶ 26-27); 740 ILCS 160/5(a)(1)(actual fraud), 160/5(a)(2)(constructive fraud).

When determining whether a debtor had an actual intent to defraud a creditor, a court considers up to eleven (11) “badges”of fraud which, in the aggregate, hone in on when a transfer was made, to whom, and what consideration flowed to the debtor in exchange for the transfer.

The court found that the Delaware LLC’s transfers of over $3M before the arbitration hearing had several attributes of actual fraud. Chief among them were that (i) the transfer was to an “insider” (i.e. a corporate officer and his relative), (ii) the Delaware LLC transferred assets without telling the plaintiff knowing that the plaintiff had a claim against it; (iii) the Delaware LLC received no consideration a $400K “management fee” paid to the Illinois LLC (the Delaware LLC’s sole member); and (iv) the Delaware LLC was insolvent after the  transfers.

Aside from reversing the UFTA judgment, the court also found the plaintiff should have won on its piercing the corporate veil and breach of fiduciary duty claims.  On the former, piercing claim, the court held that the evidence of fraudulent transfers by the Delaware LLC to the Illinois LLC presented a strong presumption of unjust circumstances that would merit piercing.  Under Delaware law (Delaware law governed since the defendant was based there), a court will pierce the corporate veil of limited liability where there is fraud or where a subsidiary is an alter ego of its corporate parent.  (¶ 41)

On the fiduciary duty count, the court held that once the Delaware LLC became insolvent, the Illinois LLC’s manager owed a fiduciary duty to creditors like the plaintiff to manage the Delaware LLC’s assets in the best interest of creditors. (¶¶ 45-46)

Afterwords:

A pro-creditor case in that it cements proposition that a UFTA plaintiff can prevail where he shows the convergence of several suspicious circumstances or “fraud badges” (i.e., transfer to insider, for little or no consideration, hiding the transfer from the creditor, etc.).  The case illustrates a court closely scrutinizing the timing and content of transfers that resulted in a company have no assets left to pay creditors.

Another important take-away lies in the court’s pronouncement that a corporate officer owes a fiduciary duty to corporate creditors upon the company’s dissolution.

Finally, the case shows the analytical overlap between UFTA claims and piercing claims.  It’s clear here at least, that where a plaintiff can show grounds for UFTA liability based on fraudulent transfers, this will also establish a basis to pierce the corporate veil.