Non-reliance Clause Defeats Fraud In Inducement Claim In Employment Agreement Dispute – IL Court

Colagrossi v. Bank of Scotland, 2016 IL (App) 1st 142216 examines fraud in the inducement in an employment dispute involving parent and subsidiary companies and their respective successors.

The key question was whether a non-reliance clause in an employment contract barred a fraud in the inducement claim based on pre-contract statements by a party?  The answer:  “Yes.”

The case features a tortured procedural history and this tedious litigation timeline:

2005 – Plaintiff receives offer letter from Company 1 for plaintiff to perform futures trading services.  The offer letter contains a non-reliance clause that subsumes all oral representations concerning the offer letter’s subject matter.

2006 – Plaintiff enters into employment agreement with Company 2 – Company 1’s successor.  This agreement also has a non-reliance clause.

2006-2007 – Plaintiff contends that while negotiating the offer letter specifics, Company 1’s officer fails to disclose to Plaintiff that Company 1 is about to be sold to Company 2 and had plaintiff known this, he wouldn’t have accepted Company 1’s offer.

2008 – Plaintiff files two lawsuits.  He sues Company 1 for fraud in the inducement and then sues Company 2 under the same legal theories.  Company 2 removes that case to Federal Court (based on diversity of citizenship).

2011 – Plaintiff files a third lawsuit; this time naming Company 3 – Company 1’s parent – and Company 4, the entity that purchased Company 3.

2013 – Summary judgment for Company 1 is entered in the 2008 fraud in inducement case based on non-reliance language of offer letter.

2014 – Federal court grants summary judgment for Company 2 in removed Federal case (the removed 2008 case) based on same non-reliance clause

2014 – Plaintiff’s 2011 lawsuit against Companies 3 and 4 dismissed based on res judicata in that the same issues were already litigated in the 2008 fraud in inducement case against Company 1

Plaintiff appealed the dismissal of the 2011 lawsuit.

Held: Affirmed

Reasons:

Fraud in the inducement  requires a plaintiff to plead and prove (1) a false representation of material fact, (2) made with knowledge or belief in the representation’s falsity, (3) made with the purpose of inducing a plaintiff to act or refrain from acting, and (iv) the plaintiff reasonably relied on the defendant’s representation (or non-representation) to plaintiff’s detriment. (¶¶ 44-45)

Fraud normally is no defense to the enforceability of a written agreement where the party claiming fraud had ample opportunity to discover the fraud by reading the document.

Here, the plaintiff admitted that he read the 2005 offer letter and 2006 employment contract and signed them after reviewing with his attorney.  In addition, the two agreements each spelled out that plaintiff had not relied on any oral or written representations of the parties in signing the agreements. 

The Court held that the clear non-reliance language prevented plaintiff from establishing justifiable reliance on any oral statements made by Company 1 to induce plaintiff to sign the offer letter or on Company 2 statements before signing the employment agreement. (¶ 47)

The next question for the Court was whether summary judgment for Company 1 in the 2008 case was res judicata to the 2011 case against Companies 3 and 4.  Again, Company 3 was Company 1’s corporate parent and Company 4 purchased Company 3’s assets.

In Illinois, res judicata applies where (1) there is an identity of parties or their privies, (2) identity of causes of action, and (3) final judgment on the merits.

For the first, identity of parties prong, to apply, the parties don’t have to identical.  All that’s required is their interest must be sufficiently similar.  Under Illinois law, a corporate parent and its subsidiaries can be deemed sufficiently similar for res judicata purposes as can successor and predecessor companies.  When the only difference between a predecessor and a successor (like between Company 2 and 3 here) is a name change, “obvious privity” is present.  (¶¶ 53-54)

Since the two 2008 cases and the 2011 case all stemmed from the same underlying facts, involved the same employment contract and same corporate principals, summary judgment for Company 1 and 2 in the 2008 cases barred plaintiff from repackaging the same facts and claims against Companies 3 and 4 in the 2011 case.

Afterwords:

This case and others like it make clear that for a fraud in the inducement plaintiff to establish reliance in the breach of written contract setting, he should show he was deprived of a chance to read the contract.  Otherwise, the rule against allowing fraud claims by one who fails to read a document will defeat the claim.

Another important case holding is that the ‘same parties’ res judicata element applies where parent and subsidiary (or predecessor and successor) companies are sufficiently connected so they sufficiently represents the other’s legal interests in two separate lawsuits.

Indy Skyline Photo Spat At Heart Of 7th Circuit’s Gloss on Affirmative Defenses, Res Judicata and Fed. Pleading Amendments – Bell v. Taylor (Part I)

Litigation over pictures of the Indianapolis skyline form the backdrop for the Seventh Circuit’s recent examination of the elements of a proper affirmative defense under Federal pleading rules and the concept of ‘finality’ for res judicata purposes in Bell v. Taylor.

There, several small businesses infringed plaintiff’s copyrights in two photographs of downtown Indianapolis: one taken at night, the other in daytime.  The defendants – an insurance company, a realtor, and a computer repair firm – all used at least one the plaintiff’s photos on company websites.  When the plaintiff couldn’t prove damages, the District Court granted summary judgment for the defendants and later dismissed a second lawsuit filed by the plaintiff against one of the defendants based on the same facts.  The plaintiff appealed.

The Seventh Circuit affirmed summary judgment of the first lawsuit and dismissal of the second action on both procedural and substantive grounds.

Turning to the claims against the computer company defendant, the court noted that the defendant denied using the plaintiff’s daytime photo.  The defendant used only the nighttime photo.  The plaintiff argued that the defendant failed to comply with Rule 8(b) by not asserting facts to support its denial that it used plaintiff’s daytime photo.

Rejecting this argument, the court noted that a proper affirmative defense limits or excuses a defendant’s liability even where the plaintiff establishes a prima facie case.  If the facts that underlie an affirmative defense are proven true, they will defeat the plaintiff’s claim even if all of the complaint allegations are true.  A defendant’s contesting a plaintiff’s factual allegation is not an affirmative defense.  It is instead a simple denial.  Since the computer defendant denied it used the daytime photo, there was no affirmative matter involved and the defendant didn’t have to comply with Rule 8’s pleading requirements.

The Seventh Circuit also affirmed the denial of the plaintiff’s attempt to amend his complaint several months after pleadings closed.  In Federal court, the right to amend pleadings is broad but not absolute.  Where allowing an amendment would result in undue delay or prejudice to the opposing party, a court has discretion to refuse a request to amend a complaint.  FRCP 15(a)(2).  Here, the Court agreed with the lower court that the plaintiff showed a lack of diligence by waiting until well after the amending pleadings deadline passed.  The plaintiff’s failure to timely seek leave to amend its complaint supported the court’s denial of its motion.

The Court also affirmed the District Court’s dismissal of the plaintiff’s second lawsuit on res judicata grounds.  When the District Court entered summary judgment for defendants on plaintiff’s copyright and state law claims (conversion, unfair competition), plaintiff’s equitable relief claims (declaratory judgment and injunctive relief) were pending.  Because of this, the summary judgment order wasn’t final for purposes of appeal.  (Plaintiff could only appeal final orders – and until the court disposed of the equitable claims, the summary judgment order wasn’t final and appealable.)

Still, finality for res judicata purposes is different from appellate finality.  An order can be final and have preclusive effect under res judicata or collateral estoppel even where other claims remain.  This was the case here as plaintiff’s sole claim against the computer company defendant was for copyright infringement.  The pending equitable claims were directed to other defendants.  So the District Court’s summary judgment order on plaintiff’s copyright infringement claims was final as to the computer defendant.  This finality triggered res judicata and barred the plaintiff’s second lawsuit on the same facts.

Afterwords:

The case’s academic value lies in its thorough summary of the pleading requirements for affirmative defenses and the factors guiding a court when determining whether to permit amendments to pleadings.  The case also stresses that finality for appeal purposes is not the same as for res judicata or collateral estoppel.  If an order disposes of a plaintiff’s claims against one but not all defendants, the order is still final as to that defendant and the plaintiff will be precluded from later filing a second lawsuit against that earlier victorious defendant.

Veil Piercing Money Judgment Survives Res Judicata Defense – Mich. Court

Piercing the corporate veil, as metaphorical phrase and very real remedy, applies when a shareholder abuses the corporate form to shield himself from liability to corporate creditors. A prototypical piercing scenario is where a sole shareholder so controls his company that it blurs the separation between shareholder and company and is unfair to protect the shareholder from personal liability for company debts.  In such a case, the law views the company and shareholder as inseparable “alter egos” and a court will bypass the liability protection normally afforded a corporate shareholder.

Green v. Ziegelman, 310 Mich.App. 436 (2015) chronicles a piercing defendant’s efforts to avoid personal liability for a breach of contract debt by asserting the res judicata defense. After a 2006 breach of contract money judgment against an architectural firm went unsatisfied, the plaintiff sued the firm’s sole shareholder in 2012 to hold him responsible for the prior judgment.

The defendant – the sole shareholder of an architectural firm – moved for summary judgment that the claim against him was barred by res judicata.  He argued that the plaintiff could have sought to pierce the architecture firm’s corporate veil in the 2006 action but failed to do so.  Now, according to the defendant, it was too late.

The trial court disagreed and denied the shareholder’s summary judgment motion.  After the trial court entered judgment for the plaintiff after trial, the defendant appealed.

Result: Trial court judgment upheld.

Reasons: Michigan law applies a three-part res judicata test: if (1) there is a final judgment on the merits, (2) the second lawsuit’s issue could have been resolved in the first lawsuit, and (3) both actions (the first and second lawsuit) involve the same parties, a second claim will be barred by res judicata.

Res judicata extends not only to claims that were actually litigated but to claims that could have been raised.  The res judicata doctrine is applied to promote fairness; it balances a plaintiff’s right to have his day in court versus a defendant’s competing right to have litigation closure along with the court’s interest in case finality and conserving court resources.

To prevail on a piercing claim in Michigan, a plaintiff doesn’t have to prove a corporate shareholder committed intentional fraud.  It is enough if the shareholder acts “in such a manner as to defraud and wrong the [plaintiff]” or in such circumstances that a court “would aid in the consummation of a wrong” if it validated a company’s separate existence from its shareholder.

To determine whether the plaintiff could have (and should have) sought to pierce the architectural firm’s corporate veil in the 2006 case, the Court noted that under Michigan law, corporate officers are expected to respect a corporation’s separate existence from its individual members.  Because of this, absent evidence that the shareholder defendant abused the corporate form, a piercing claim would not have been well-founded when plaintiff sued in the 2006 case.

The appeals court found that since there was no evidence to signal misuse of the corporate form, there was no reason for the plaintiff to try to pierce the architect company’s corporate veil in the earlier lawsuit.  As a result, the 2012 piercing case did not stem from the same underlying transaction as the 2006 breach of contract case.

Upholding the piercing judgment, the appeals court held that the shareholder completely dominated the architectural firm such that the firm and shareholder were the same person.  Other important factors that led the court to approve the piercing judgment included evidence that the shareholder commingled personal assets with company assets, that the company failed to follow basic corporate formalities, and that 10 days after judgment, the shareholder dissolved the architectural firm and started a new one.

Take-aways:

1/ The res judicata defense won’t bar a piercing the corporate veil claim unless there was clear evidence of fraud or an alter-ego relationship between company and shareholder at the time a prior lawsuit against the corporation was filed;

2/ A plaintiff in a piercing suit under Michigan law isn’t required to show specific fraudulent conduct by the dominant shareholder.  It’s enough that there is an overall “feel” of unfairness based on a multitude of factors including failure to follow formalities, undercapitalization and commingling of personal vs. company assets.