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 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.

 

Homeowner’s Piercing Claim Against Contractor Fails – Delaware Chancery Court

Since Delaware’s storied Chancery Court is widely regarded as the alpha and omega of corporate law venues, this opinion from Halloween eve of this year captured my attention.

The issues addressed in Doberstein v. G-P Industries, Inc. (http://courts.delaware.gov/opinions/download.aspx?ID=231700) concern the scope of the Chancery Court’s jurisdiction and the quantum of pleading specificity needed to state a piercing the corporate veil claim.

Plaintiff, who lived most of the year in Switzerland, sued the defendants for failing to timely construct renovations to her Delaware home.  All told, the plaintiff paid over $500K to the defendant for only about $300K worth of work (according to the plaintiff’s construction expert).  The plaintiff brought legal (fraud, breach of contract) and equitable claims (unjust enrichment, piercing the corporate veil, negligent misrepresentation (i.e. “equitable fraud”) against the corporate and individual defendants.

The Delaware court struck the equitable claims for failure to state a claim and dismissed the ancillary law claims for lack of subject matter jurisdiction.

The piercing claim failed because the plaintiff conflated (a) fraudulent conduct by the corporate defendant with (b) abuse of the corporate form by the corporation’s controlling shareholder.  The former is actionable under a fraud theory while the latter scenario gives rise to a piercing the corporate veil of limited liability claim.

 

A piercing plaintiff must do more than formulaically  allege that a corporation is the alter ego of another or of its main shareholder, though. He must instead plead facts that show a corporate shareholder abused the corporate form in order to defraud an innocent third party.

Here, since plaintiff’s piercing claims only alleged fraud by the defendants in connection with charging for construction work they didn’t do, there were no allegations that the corporate form was abused or that the individual defendant siphoned corporate funds.

The court also dismissed the plaintiff’s negligent misrepresentation count. Also called “equitable fraud”, a negligent misrepresentation claim under Delaware law generally requires the existence of a fiduciary relationship and the abuse of that relationship by one of the parties.

A contractual relationship between two sophisticated parties does not equate to a fiduciary one.  As a result, the court found that the plaintiff’s remedy lies in a breach of contract action at law (as opposed to an action in equity).

Finally, the court dismissed the plaintiff’s unjust   enrichment count since there was an express contract between the parties. An unjust enrichment claim cannot co-exist with a breach of express contract one.

The court then found that it lacked jurisdiction over the remaining law counts for breach of contract, fraud and fraudulent concealment.

The Delaware Chancery Court is a court of limited jurisdiction. It has jurisdiction only in three settings: (1) where a party seeks to invoke an equitable right; (2) where the plaintiff lacks an adequate remedy at law; and (3) where there is a statutory delegation of subject matter jurisdiction. The prototypical equitable claims are those involving fiduciary duties that arise in the context of trusts, estates and corporations.

Where a claim contains both legal and equitable features, the Chancery court does have discretion to resolve the legal portions of the controversy. However, where the equitable claims are dismissed and there is no basis for the court to assert jurisdiction over the remaining legal claims, the court lacks subject matter jurisdiction over the legal claims and they will be dismissed.

Here, once the plaintiff’s equitable claims (unjust enrichment, negligent misrepresentation) were disposed of, there was no “hook” for the court to retain jurisdiction over the legal claims.

Take-aways:

The case solidifies proposition that a plaintiff who seeks to pierce the corporate veil must show fraud in connection with an abuse of the corporate form. If the fraud relates to conduct by the corporation and not to a misuse of the corporate form (i.e. as an alter-ego or instrumentality of the key shareholder), the plaintiff’s remedy is an action at law against the corporation; not the individual corporate agent.

The case also provides a useful summary of what types of claims the Delaware Chancery Court will entertain and when it will handle legal claims that are filed in   conjunction with equitable ones.