Tag: seventh circuit

Filing Lawsuit Doesn’t Meet Conversion Suit ‘Demand for Possession’ Requirement – 7th Cir. (applying IL law)

Conversion, or civil theft, requires a plaintiff to make a demand for possession of the converted property before suing for its return.  This pre-suit demand’s purpose is to give a defendant the opportunity to return plaintiff’s property and avoid unnecessary litigation.

What constitutes a demand though?  The easiest case is where a plaintiff serves a written demand for return of property and the defendant refuses.  But what if the plaintiff doesn’t send a demand but instead files a lawsuit.  Is the act of filing the lawsuit equivalent to sending a demand?

The Seventh Circuit recently answered that with a “no” in Stevens v. Interactive Financial Advisors, Inc., 2016 WL 4056401 (N.D.Ill. 2016)

The plaintiff there sued his former brokerage firm for tortious interference with contract and conversion when the firm blocked plaintiff’s access to client data after he was fired.

The District Court granted summary judgment for defendant on the plaintiff’s tortious interference claim and a jury later found judgment for defendant on plaintiff’s conversion suit.

At the conversion trial, the jury submitted this question to the trial judge: “Can we consider [filing] the lawsuit a demand for property?”

The trial judge answered no: under Illinois law, filing a lawsuit doesn’t qualify as a demand for possession.  The jury entered judgment for the defendant and plaintiff appealed.

Affirming the jury verdict, the Seventh Circuit addressed whether impeding a plaintiff’s access to financial data can give rise to a conversion action in light of Illinois’s pre-suit demand for possession requirement and various Federal securities laws.

To prove conversion under Illinois law, a plaintiff must show (1) he has a right to personal property, (2) he has an absolute and unconditional right to immediate possession of the property, (3) he made a demand for possession, and (4) defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.

The Court held that since the firm was bound by Federal securities laws that prohibiting it from disclosing nonpublic client information to third parties, coupled with plaintiff’s firing, the plaintiff could not show a right to immediate possession of the locked out client data.

The Seventh Circuit also agreed with the jury upheld the jury verdict on the insurance clients conversion suit based on the plaintiff’s failure to make a demand for possession.  The Court noted the plaintiff failed to demand the  return of his insurance client’s data before he sued.

And since Illinois courts have never held that the act of suing was a proxy for the required demand, the Seventh Circuit affirmed the jury verdict.

The Court also nixed the plaintiff’s “demand futility” argument: that a demand for possession would have been pointless given the circumstances of the given case. (Demand futility typically applies where the property has been sold or fundamentally damaged.)

The Seventh Circuit found that the jury properly considered the demand futility question and ruled against the plaintiff and there was no basis to reverse that finding.

Afterwords:

1/ A conversion plaintiff’s right to client data will not trump a Federal securities law protecting the data.  In addition, a pre-suit demand for possession is required to make out a conversion action unless the plaintiff can show that the demand is pointless or futile;

2/ Filing a lawsuit doesn’t dispense with the conversion tort’s demand for possession.

3/ A conversion plaintiff must make a demand for possession before suing even where the demand is likely pointless. Otherwise, the risk is too great that the lack of a demand will defeat the conversion claim.

 

7th Circuit Provides Primer on Fraudulent Transfer and Alter Ego Doctrine In Contract Dispute

The Seventh Circuit affirmed an almost $3M judgment against the defendants under fraudulent transfer, successor liability and alter ego rules in Center Point v. Halim, 2014 WL 697501.

The plaintiff energy company entered into a written contract to supply natural gas to defendants’ 41 Chicago area rental properties.  The individual defendants – a husband and wife – managed the properties through a management company (Company 1).

Over a two-year period, defendants used over $1.2M worth of plaintiff’s gas and didn’t pay for it.  Plaintiff sued Company 1 in state court and got a $1.7M judgment.  When plaintiff discovered that defendants transferred all of Company 1’s assets to Company 2, plaintiff sued Company 2 and the husband and wife in Federal court alleging a fraudulent transfer and successor liability.  The Northern District entered summary judgment for plaintiff in the amount of $2.7M on all claims and defendants appealed.

Affirming, the Seventh Circuit first found that the defendants’ conduct violated the Illinois Fraudulent Transfer Act, 740 ILCS 160/1 (the “Act”).  The Act punishes debtor attempts to avoid creditors through actual fraud or constructive fraud.

Constructive fraud applies where (1) a debtor transfers assets without receiving a reasonably equivalent value in exchange for the transfer and (2) the debtor intends to incur or reasonably should believe he will incur debts beyond his ability to pay them as they become due.  Halim, *2, 740 ILCS 160/5.

The Court found that the defendants’ actions were constructively fraudulent. First, the Court noted that during a three-year time span, Company 1 (the state court judgment debtor) transferred almost $11M to the individual defendants; ostensibly to repay loans.

But the Court found it odd there was no documentation of loans or a paper trail showing where the millions of dollars went.  The suspicious timing of defendants’ creation of a new company – Company 2 – coupled with the defendants’ inability to account for the millions’ whereabouts, bolstered the Court’s constructive fraud finding.

Since the individual defendants’ depletion of Company 1’s assets made it impossible for it to pay the state court judgment, the defendants’ actions were constructively fraudulent under the Act. *3.

The Court also affirmed summary judgment for the plaintiff under successor liability and alter ego theories.  In Illinois, the general rule is that a company that purchases assets of another company does not assume the liabilities of the purchased company.

A common exception to this rule is where there is an express assumption (of liability) by the purchasing company.  Here, the record showed that Company 2 assumed all rights, obligations, contracts and employees of Company 1.  As a result, the unsatisfied state court judgment attached to Company 2 under successor liability rules.

The Court also affirmed the judgment under the alter ego doctrine.  Alter ego applies where there is virtually no difference between the business entity and that entity’s controlling shareholders.  That is, the dominant shareholders don’t treat the corporation as a separate entity and fail to follow basic corporate formalities (e.g. minutes, stock issuance, incorporation papers, etc.).

The individual defendants treated Company 1 as their personal piggy bank by commingling their personal assets with the corporate assets.  There were no earmarks of “separateness” between the individual defendants’ assets and Company 1’s corporate assets.  *3-4.

Because of this, the husband and wife defendants were responsible (in the Federal suit) for the unsatisfied state court judgment entered against the defunct Company 1.

Take-away: Halim illustrates that where a judgment debtor corporation or controlling shareholders of that corporation transfer all corporate assets to a new, similarly named (or not) entity shortly after a lawsuit is filed, it will likely look suspicious and can lead to a constructive fraud finding.

The case also underscores the importance of following corporate formalities and keeping corporate assets separate from individual/personal assets – especially where the corporation is controlled by only two individuals.  A failure to treat the corporation as distinct from the dominant individuals, can lead to alter ego liability for those individuals.

Seventh Circuit Files: Court Voids LLC Member’s Attempt to Pre-empt LLC’s Suit Against That Member

In Carhart v. Carhart – Halaska International, LLC, (http://law.justia.com/cases/federal/appellate-courts/ca7/14-2968/14-2968-2015-06-08.html) the plaintiff LLC member tried to shield himself from a lawsuit filed against him by the LLC by (1) taking an assignment of a third-party’s claim against the LLC; (2) getting and then registering a default judgment against the LLC; (3) seizing the LLC’s lone asset: its lawsuit against the plaintiff; and (4) buying the lawsuit for $10K.  This four-step progression allowed the plaintiff to extinguish the LLC’s claim against him.

Plaintiff was co-owner of the defendant LLC.  After a third-party sued the LLC in Minnesota Federal court (the “Minnesota Federal Case”), Plaintiff paid the third-party $150,000 for an assignment of that case.  Plaintiff then obtained a $240K default judgment against the LLC.

Meanwhile, the LLC, through its other owner, sued the plaintiff in Wisconsin State Court (the “Wisconsin State Case”) for breach of fiduciary duty in connection with plaintiff’s alleged plundering of the LLC.  While the Wisconsin State Case was pending, Plaintiff registered the Minnesota judgment against the LLC in Wisconsin Federal court.

Plaintiff, now a judgment creditor of the LLC, filed suit in Wisconsin Federal Court (the “Wisconsin Federal Case”) to execute on the $240K judgment against the LLC.  The Wisconsin District Court allowed the plaintiff to seize the LLC’s lone asset – the Wisconsin State Case (the LLC’s breach of fiduciary duty claim against plaintiff) – for $10,000.  This immunized the plaintiff from liability in the Wisconsin State Case as there was no longer a claim for the LLC to pursue against the plaintiff.  The LLC appealed.

The Seventh Circuit voided the sale of the Wisconsin State Case finding the sale price disproportionately low.

Under Wisconsin law, a chose in action is normally considered intangible property that can be assigned and seized to satisfy a judgment.  However, the amount paid for a chose in action must not be so low as to shock the conscience of the court.

In this case, the court branded the plaintiff a “troll of sorts”: it noted the plaintiff buying the LLC’s claim (the Wisconsin State Case) at a steep discount: the defendant paid $150,000 for an assignment of a third-party claim against the LLC and then paid only $10,000 for the LLC’s breach of fiduciary duty claim against plaintiff.

The court found that under Wisconsin law, the $10,000 the plaintiff paid for the LLC’s claim against him was conscience-shockingly low compared to the dollar value of the LLC’s claim.  The plaintiff did not purchase the LLC’s lawsuit in good faith.  The Seventh Circuit reversed the District Court’s validation of plaintiff’s $10K purchase so the LLC could pursue its breach of fiduciary duty claim against the plaintiff in the Wisconsin State Case.

Take-aways:

This seems like the right result.  The court guarded against a litigant essentially buying his way out of a lawsuit (at least it had the appearance of this) by paying a mere fraction of what the suit was possibly worth.  

The case serves as an example of a court looking beneath the surface of a what looks like a routine judgment enforcement tool (seizing assets of a judgment debtor) and adjusting the equities between the parties.  By voiding the sale, the LLC will now have an opportunity to pursue its breach of fiduciary duty claim against the plaintiff in state court.