Paul Porvaznik – Business Litigator

Tag: third-party

  • Corporate Officer Can’t Tortiously Interfere with His Company’s Contract; No Punitives for Breach of Contract – ND IL

    In Richmond v. Advanced Pain Consultants, P.C., 2015 WL 4971040 (N.D.Ill. 2015), the plaintiff sued the defendants – two companies that operated suburban (Chicago) pain clinics and their doctor principal – claiming several thousand dollars in unpaid computer and accounting services plaintiff performed at the clinics over a several-month period.  The plaintiff brought claims for overtime under the Federal Fair Labor Standards Act and joined companion state law claims for breach of contract, quantum meruit and tortious interference with contract.  The defendants moved to dismiss plaintiff’s claims arguing preemption and the failure to state a claim, among other things.

    In dismissing some of plaintiff’s claims (and sustaining others), the Northern District stressed some vital pleading rules and substantive law principles that apply in Federal court litigation.

    Federal Notice Pleading Requirements

    Federal Rule 8(a)(2) requires a “short and plain statement of the claim showing a pleader is entitled to relief.”  The plaintiff must provide enough factual context to rise above a speculative level so that a defendant has “fair notice” of what the plaintiff’s claim is.  However, “threadbare recitals of the elements of a cause of action” are not enough to survive a Rule 12(b)(6) dismissal motion.

    Preemption and Punitive Damages

    The defendant first argued the plaintiff’s common law claims (breach of contract, quantum merit, tortious interference) were preempted by the FLSA.  FLSA preempts common law claims that seek to recover overtime or minimum wage compensation.  But if the plaintiff’s claim seeks something other than overtime or minimum wage payments, those claims aren’t preempted.  Here, several of the plaintiff’s claims were for “regular wages” (not overtime) and so were not preempted by FLSA.

    The court next struck plaintiff’s punitive damages claim from his breach of contract suit.  Under Illinois law, contract law’s sole purpose is to compensate the nonbreaching party.  It does not seek to punish the breaching party or give an economic windfall to the plaintiff.  This is true even if the breach is intentional.  Punitive damages can only be allowed in the breach of contract setting where the breach is itself an actionable, independent tort (e.g. a civil conspiracy, fraud, etc.).  Since there was no independent tortious conduct over and above the breach of contract – failure to pay plaintiff for his office services – the court struck plaintiff’s punitive damages claims.

    Tortious Interference Against A Single-Member Corporation

    The court dismissed the plaintiff’s tortious interference claims against the individual defendant – the sole shareholder of the two corporate defendants.

    To state a claim for tortious interference with contract, a plaintiff must allege: (i) the existence of a valid and enforceable contract between a plaintiff and another; (ii) defendant’s awareness of the contractual obligation; (iii) defendant’s intentional and unjustified inducement of a breach of contract; (iv) breach of the contract by the third party caused by the defendant’s wrongful conduct.

    A colorable tortious interference claim requires the involvement of at least three entities: (1)-(2) the parties to the contract and (3) the person inducing the breach.

    Here, the individual defendant was the sole officer and manager of the two defendant medical offices who had unchallenged authority to make all hiring and firing decisions for the two entities.  The court noted that the two corporate defendants wouldn’t exist without the individual defendant.  There were no other shareholders or parties who had an interest in the corporate defendants.  Since the individual defendant was the only operator and stakeholder in the corporate defendants, he could not tortuously induce a breach of (effectively) his own contract with the plaintiff.

    Afterwords:

    The case provides some useful damages law reminders including that in a breach of contract suit, punitive damages normally can’t be recovered.  The plaintiff must show that the defendant’s breach is itself an intentional tort for a punitive claim possibly to lie.

    Advanced Pain Consultants also makes clear that an officer of a corporation cannot tortiously interfere with a contract involving that corporation where that officer is the only shareholder of the corporation and has sole responsibility for the corporation’s business.

     

  • Unjust Enrichment – For When the Handshake Deal Goes Bad

    An imploded business arrangement for importing and then selling Christmas decorations sets the stage for the Northern District’s (IL) analysis of a slew of signature commercial litigation issues in Sunny Handicraft, Inc. v. Envision This!, LLC, 2015 WL 231108. 

    While the case only involves a ruling on a 12(b)(6) pleadings motion, it’s still post-worthy for its discussion of some important and recurring issues that arise in breach of contract lawsuits.

    The plaintiff ornament maker entered into an agreement with defendants – a buyer (“Buyer”) and end-retailer (“Retailer”) of the decorations, respectively – for about $3.5M worth of Christmas-themed merchandise. Plaintiff sued when the defendants failed to pay.

    The Buyer, for its part, counter-sued the plaintiff to recoup unpaid advertising costs and miscellaneous shipping charges. The Retailer moved to dismiss several complaint counts and the plaintiff moved to dismiss the purchaser defendant’s counterclaims.

    Granting the Retailer’s motion to dismiss the unjust enrichment count, the court pronounced that unjust enrichment  is a ‘quasi-contract’ theory where a court implies a contract in order to prevent unjust results. 

    An unjust enrichment plaintiff must allege that defendant has unjustly retained a benefit to the plaintiff’s detriment and that retention violates fundamental principles of equity, justice and good conscience.

    But a party can’t claim unjust enrichment where an express contract governs the parties’ relationship. A plaintiff can, however, plead unjust enrichment as an alternative theory to a breach of contract claim as long as the plaintiff doesn’t incorporate the express contract allegations into its unjust enrichment ones.

    Generally, a court will not impose unjust enrichment liability against a third party that receives a benefit from the plaintiff’s agreement with another party. So, if x and y have a contract, x normally won’t be able to sue z just because z happens to benefit from x’s services. 

    The only time a third party can be liable for unjust enrichment is where the plaintiff can show that the plaintiff had a reasonable expectation of being paid by the third party. *4.

    The court granted the Retailer’s motion to dismiss the plaintiff’s unjust enrichment claim and denied the plaintiff’s motion to dismiss the Buyer’s unjust enrichment counterclaim.  On the former claim, the plaintiff failed to allege any conduct by the Seller that would lead plaintiff to have a reasonable expectation of being paid by the Seller.

    Plaintiff’s conclusory allegation that the Retailer “was aware” that Plaintiff expected payment was too bare to survive dismissal.  The plaintiff was required to plead specific conduct by the Retailer that could lead plaintiff to reasonably expect payment.

    The court did allow the Buyer’s unjust enrichment counterclaim to proceed.  The Buyer pled unjust enrichment in the alternative to its breach of contract count and alleged that it conferred a measurable benefit – marketing services and paid shipping expenses – on the plaintiff and that the plaintiff’s retention of the Buyer’s services without paying for them was unfair.

    Afterwords:

    – Unjust enrichment is viable alternative claim even where there is an express contract that governs;

    – A plaintiff can implicate a third party in an unjust enrichment case where he can offer evidence or plead facts that demonstrate the plaintiff had a reasonable expectation of being paid by the third party.

  • Pawn Broker Wins Priority Dispute Against Creditor Involving Debtor’s Harley Davidson Motorcycle

    In Coal City Red-Mix Company v. Kavanaugh, 2014 IL App (3d) 130332-U, two competing creditors – a judgment creditor and a pawn shop – each claimed superior rights to the debtor defendant’s Harley Davidson motorcycle (the “Bike”).  The plaintiff got a default money judgment against the defendant in February 2012 and issued post-judgment citation proceedings to discover whether the defendant had assets to apply to the judgment.  About seven months later, and before he appeared in response to the citation, the defendant secretly pawned the Bike to a local pawn shop for a $3,500 loan.  The pawn shop took possession of the Bike but didn’t take title to it.  The defendant kept the Bike’s title.

    When the plaintiff discovered that the defendant pledged the Bike, the plaintiff served a third-party citation on the pawn shop and sought a court order requiring the pawn shop to turn the Bike over to the plaintiff.  After an evidentiary hearing, the Court ruled that the plaintiff had a superior interest in the Bike and the pawn shop appealed.

    Held: Reversed.  The pawn shop’s interest in the Bike trumps the plaintiff’s.

    Rules/Reasoning:

    In finding for the pawn shop, the Court noted that under Illinois judgment collection rules, a creditor like the plaintiff can issue a citation not only to the debtor but also to a third party (like the pawn shop) who has property belonging to the debtor  in its possession.  735 ILCS 5/2-1402(m)(1)-(2).  Once a citation is served, it become a lien on a debtor’s non-exempt personal property.  But a citation lien doesn’t impact the rights of respondents in property prior to service of a citation, and it also doesn’t affect the rights of bona fide purchasers or “lenders without notice” of the citation.  735 ILCS 5/2-1402(m).

    Here, the plaintiff properly directed a third party citation to the pawn shop since it had personal property – the Bike – that belonged to the debtor in its possession.  The pawn shop argued that it was a bona fide purchaser since the debtor signed a power of attorney that allowed the pawn shop to transfer title to the Bike if the debtor failed to repay the pawn shop loan.  Illinois law defines a bona fide purchaser as someone “who takes title in good faith for value without notice of outstanding rights or interests of others.”  (¶ 15).  The parties’ intent (and not formalistic labels) determines whether ownership in personal property is transferred.  In this case, the Court found that the pawn broker wasn’t a bona fide purchaser since it had only a possessory interest in the debtor’s Bike.  It never “took title” to it.  (¶¶ 16-17).

    But the pawn shop still won the priority dispute.  That’s because it was a  “lender without notice” under Code Section 2-1402(m).

    The Illinois Pawnbroker Regulation Act, 205 ILCS 510/0.01 (the Pawnbroker Act)  specifically defines a pawnbroker as an individual or entity that lends money on the deposit or pledge of physically delivered personal property (among other things). (¶23).  A pawn transaction is viewed as a “super secured loan transaction” where the lender (pawn shop) holds a borrower’s personal property as security for a loan.

    Here, the pawnbroker was clearly covered by the Pawnbroker Act and so it met the statutory definition of a lender.  The pawn shop also lacked notice of the plaintiff’s prior citation lien since it didn’t find out about plaintiff’s judgment until the plaintiff served the third-party citation and sought the Bike’s turnover.

    Since the pawn shop met the statutory definition of a “lender” and because it lacked notice of plaintiff’s prior judgment, it was a “lender without notice” under  Code Section 2-1402(m).  As a result, the plaintiff’s citation lien on the defendant’s property – including the Bike – didn’t affect the rights of the pawn shop.  The pawn shop had superior rights to the Bike over the plaintiff.

    Take-away: I can relate to how frustrated the plaintiff creditor must have been in this case.  It followed the supplementary proceedings rules to the letter yet still lost out to a competing (and unwitting) claimant.  If I was in plaintiff’s position,  I think I would now focus my energies on trying to freeze the defendant’s bank account (if he has one), on serving a wage deduction summons on defendant’s employer (if he has a job) or attempting to levy on any of the defendant’s non-exempt personal property.  Either way, this case illustrates how arduous a task it is for a creditor to collect on a money judgment.