False Info in Employee Time Records Can Support Common Law Fraud Claim – IL Fed Court

Some key questions the Court grapples with in Laba v. CTA, 2016 WL 147656 (N.D.Ill. 2016) are whether an employee who sleeps on the job or runs personal errands on company time opens himself up to a breach of fiduciary or fraud claim by his employer.  The Court answered “no” (fiduciary duty claim) and “maybe” (fraud claim) in an employment dispute involving the Chicago Transit Authority (CTA).

Some former CTA employees sued the embattled transit agency for invasion of privacy and illegal search and seizure after learning the CTA implanted Global Positioning System (“GPS”) technology on the plaintiffs’ work-issued cell phones. An audit of those phones revealed the plaintiffs’ regularly engaged in personal frolics during work hours.

The CTA removed the case to Federal court and filed various state law counterclaims to recoup money it paid to the ex-employees including claims for breach of fiduciary duty, fraud and conversion. The Northern District granted in part and denied in part the plaintiff’s motion to dismiss the CTA’s counterclaims.

Breach of Fiduciary Duty

Sustaining the CTA’s breach of fiduciary duty claim against the ex-employees’ motion to dismiss, the Court looked to black-letter Illinois law for guidance.  To state a breach of fiduciary duty claim in Illinois, a plaintiff must allege (1) the existence of a fiduciary duty, (2) breach of that duty, and (3) breach of the duty proximately caused damages.  The employer-employee relationship is one the law recognizes as a fiduciary one.

While the extent of an employee’s duty to his employer varies depending on whether the employee is a corporate officer, the law is clear that employees owe duties of loyalty to their employers.  Where an employee engages in self-dealing or misappropriates employer property or funds for the employee’s personal use, it can give rise to a fiduciary suit by the employer.

Here, the Court found that the employees’ conduct, while irresponsible and possibly negligent, didn’t rise to the level of disloyalty under the law.  The Court made it clear that under-par job performance doesn’t equate to conduct that can support a breach of fiduciary duty claim. (**6-7).

Fraudulent Misrepresentation

The Court upheld the CTA’s fraudulent misrepresentation claim – premised on the allegation that the plaintiffs lied to the CTA about the hours they were working in order to induce the CTA to pay them.  Under Illinois law, a fraud plaintiff must show (1) a false statement of material fact, (2) known or believed to be false by the party making the statement, (3) with the intent to induce the statement’s recipient to act, (4) action by the recipient in reliance on the truth of the statement, and (5) damage resulting from that reliance.

Under the Federal pleading rules, a fraud claimant must plead the “who, what, where when and how” of the fraud but the allegation of a defendant’s intent or knowledge can be alleged generally.

Here, the Court found that the CTA sufficiently alleged a fraudulent scheme by the employees to misrepresent the hours they worked in exchange for their paychecks.  This was enough, under Illinois fraud law, to survive the employees’ motion to dismiss.  See FRCP 9(b); (*7).


1/ While an employee owes an employer fiduciary duties of loyalty, his sub-par job performance doesn’t equate to a breach of fiduciary duty.  There must be self-dealing or intentional conduct by the employee for him to be vulnerable to an employer’s fiduciary duty suit;

2/ An employee misrepresenting hours work can underlie a common law fraud claim if the employer can show it paid in reliance on the truth of the employee’s hour reporting;




The ‘Justifiable Reliance’ Element Of A Fraud Claim (Illinois Law)

In Siegel Development, LLC v. Peak Construction, LLC, 2013 IL App (1st) 11973, the First District affirmed summary judgment in favor of a building seller and contractor in the building buyers’ fraud suit.

Facts: The building buyers (plaintiffs) and defendants entered into a contract for the purchase of a four-unit apartment building that plaintiffs planned to convert to condominiums.  Plaintiffs forecasted spending about $700,000 to buy the building and then another $180K in renovation costs.  The renovation figure was based on a spreadsheet provided by the defendant contractor which outlined the projected costs.  The contractor also informed the plaintiffs that it could perform all renovation work under a limited repair-and-replacement permit from the City.

Before closing, an architect repeatedly told the plaintiffs that the building needed more extensive repairs than were estimated by the contractor and that plaintiffs would need a “full permit” (as opposed to repair-and-replacement one) to complete the repairs.  Plaintiffs ignored the architect’s suggestion and  proceeded to closing without securing a full permit and also opted against a pre-closing property inspection.

After plaintiffs bought the building, the contractor informed them that it couldn’t proceed with the spreadsheet repairs and  couldn’t perform the work under a repair and replacement permit.  Plaintiffs also discovered numerous structural defects in the building which required repair costs far exceeding the contractor’s spreadsheet estimates.  Plaintiff sued the seller and contractor (and its agents) for fraud, rescission and breach of contract.

Trial court and appeals court holdings: The trial court entered summary judgment for the defendants.


Plaintiffs failed to raise a genuine issue of fact on whether defendants made an actionable misrepresentation to plaintiffs concerning the building and failed to show justifiable reliance on any of defendants’ building representations.

Illinois law requires a fraud plaintiff to establish (1) a misrepresentation or false statement of material fact; (2) by one who knows or believes the statement to be false; (3) made with the intent to induce action by another in reliance on the statement, (4) action by the other in reliance on the truthfulness of the statement; and (5) injury resulting from the reliance.  ¶ 111

Plaintiffs’ misrepresentation claim was premised on the contractor’s spreadsheet document that estimated building repairs at about $180K.  The Court found the document too indefinite to bind the defendants since there was no meeting of the minds on the project specifics and scope of work. 

The Court also affirmed the trial court’s finding of no justifiable reliance as a matter of law.  Fraud reliance must be reasonable.  To determine whether reliance is reasonable, the Court considers all facts known to the plaintiff and all facts which the plaintiff could have learned through the exercise of ordinary prudence. A fraud plaintiff cannot enter a transaction “with his eyes closed” and later claim he was deceived.  But where a representation concerns a fact that is uniquely within the speaker’s knowledge, the recipient can rely upon it without investigation.  ¶ 114

In finding no justified reliance as a matter of law, the First District cited record evidence that plaintiffs decided to purchase the property without a signed repair contract or a pre-closing inspection.  ¶ 114.

The Court also found that the sales contract’s written warranty prevented the plaintiff from claiming it relied on the defendants’ oral statements about the building’s structueral integrity.  Note: the opinion references that plaintiff’s breach of warranty claim against the seller remains pending and was not subject of the appeal.

Take-aways: Peak Construction illustrates how difficult it is for a plaintiff to prove fraud; especially where the plaintiff is a sophisticated business person or entity.  The case also shows that proving justifiable reliance is particularly hard where the plaintiff and defendant are on an equal bargaining footing and the plaintiff has an ample opportunity to investigate the truth of a supposedly false statement. 



NM Supreme Court Reinstates Legal Malpractice Claim After Firm Blows Statute

walterwhiteAfter another weekend of binge-watching Walter, Hank, Skyler and crew, I definitely have the Land of Enchantment on the brain.  How could I not after watching – no, strike that, after Devouring.  Like a Rabid, Foaming-At-The-Mouth Animal! Seasons 4-5 of ABQ-based Breaking Bad over an eye-searing three-day period (with little more than a sporadic water break).  An aside: do friends and family have interventions for Netflix addiction?  Just curious.  My friend wants to know (cough).   I also concede that I’m way way late to the party on this, but the stories are true: Br/Ba is an absolute TV masterpiece.  That’s why today’s featured case is geographically appealing to me.  Not only that, but its subject matter is interesting and its lessons, both cautionary and profound.

The Case and Facts:  Encinias v. Whitener Law Firm (Sept. 12, 2013)


Plaintiff high school student was injured in 2004 when he was badly beaten by a group of students on property adjacent to the school.  Plaintiff hired defendant law firm (Firm) in 2006 to file a personal injury suit against the defendant school district for failure to protect plaintiff and to properly respond to the attack.  The Firm failed to file suit before the two-year statute of limitations ran in October 2006.  Sometime in 2008, after plaintiff made several queries concerning the case’s status, the Firm informed plaintiff that it missed the filing deadline.  Plaintiff then sued for legal malpractice.

Disposition: The Supreme Court reversed lower court rulings for the Firm and reinstated the plaintiff’s claim.


Legal Malpractice Claim

Plaintiff’s legal malpractice claim asserted that because of the Firm’s failure to timely file suit, plaintiff’s claims against the school district are forever lost.  To plead legal malpractice in New Mexico, the plaintiff must show: (1) the employment of the defendant attorney; (2) the defendant attorney’s neglect of a reasonable duty; and (3) the negligence resulted in and was the proximate cause of loss to the client.  The NM Supreme Court focused on element three: loss to the plaintiff/client.

A NM legal malpractice plaintiff must prove loss by showing by a preponderance of the evidence that he or she would have won the underlying claim but for the attorney’s negligence. Richardson v. Glass, 1992-NMSC-046, ¶ 10.  The Firm argued that since the plaintiff’s suit would be defeated by sovereign immunity doctrine, plaintiff would have lost even if his complaint was timely filed.

The Supreme Court rejected this argument and found a triable fact question as to whether the school district waived sovereign immunity under New Mexico’s premises liability principles reflected in its tort claims statute.  Section 41-4-6(A);  ¶¶ 8-9.  The Court focused on an assistant principal’s affidavit testimony that the location of the fight was a known “hot zone” for fighting students.  This genuine issue of fact regarding the school’s knowledge of a dangerous condition on or near the school, meant that plaintiff could prevail in the underlying case and defeated summary judgment.  ¶ 13.

The Misrepresentation claim

Plaintiff alleged the Firm misrepresented that (a) no work had been done on the case and (b) the limitations period expired.  The Firm didn’t tell plaintiff until Spring 2008 that the statute ran, when there was evidence the Firm knew this in July 2007.  ¶ 21.  The Court rejected the lower courts finding that despite the Firm’s withholding information, plaintiff still didn’t sustain actual damages.

NM law permits intentional tort plaintiffs to recover nominal and punitive damages and plaintiff pled punitive damages against the Firm in his misrepresentation count.  Pointing out that the Firm specifically (and erroneously) assured the Plaintiff in October 2006 that the statute of limitations had not run and that the Firm was actively working the case, it was reasonable for plaintiff to rely on the Firm’s representations.

The Court held that the Firm’s failure to disclose that no work had been done damaged plaintiff’s ability to pursue his case against the school district.  Id., ¶¶22-23.  The Court noted record evidence that the Firm’s withholding case information (that it wasn’t working on the case and later, that the statute expired) from plaintiff made it difficult for plaintiff to collect supporting evidence in the underlying case.  Id.  And since a NM intentional tort claim doesn’t require actual damages, plaintiff established a material question of fact on his misrepresentation claim against the Firm.

Lessons: Practitioners should be cognizant and hyper-vigilant as to filing deadlines.  An undercurrent of the Court’s ruling is that the Firm not only failed to timely file, they repeatedly failed to keep the plaintiff informed of the case status.

The case also shows that actual damages aren’t required in New Mexico to state a colorable misrepresentation claim and that if a plaintiff pleads nominal or punitive damages, his claim can survive summary judgment.