Commercial Tenant’s Promise to Refund Broker Commissions Barred by Statute of Frauds – IL First Dist.

The plaintiff property owner in Peppercorn 1248 LLC v. Artemis DCLP, LLP, 2016 IL App (1st) 143791-U, sued a corporate tenant and its real estate brokers for return of commission payments where the tenant never took possession under a ten-year lease for a Chicago daycare facility.  Shortly after the lease was signed, the tenant invoked a licensing contingency and terminated the lease.

The lease conditioned tenant’s occupancy on the tenant securing the required City zoning and parking permits.  If the tenant was unable to obtain the licenses, it could declare the lease cancelled.  When the tenant refused to take possession, the plaintiff sued to recoup the commission payment.

Affirming summary judgment for the broker defendants, the Court addressed some recurring contract formation and enforcement issues prevalent in commercial litigation along with the “interference” prong of the tortious interference with contract claim.

In Illinois, where a contracting party is given discretion to perform a certain act, he must do so in good faith: the discretion must be exercised “reasonably,” with a “proper motive” and not “arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.” (73-74)

Here, there was no evidence the tenant terminated the lease in bad faith.  It could not get the necessary permits and so was incapable of operating a daycare business on the site. 

Next, the court found the plaintiff’s claim for breach of oral contract (based on the brokers’ verbal promise to refund the commission payments) unenforceable under the Statute of Frauds’ (“SOF”) suretyship rule. A suretyship exists where one party, the surety, agrees to assume an obligation of another person, the principal, to a creditor of the principal.

The SOF bars a plaintiff’s claim that seeks to hold a third party responsible for another’s debt where the third party did not promise to pay the debt in writing.

An exception to this rule is the “main purpose” defense. This applies where the “main purpose” of an oral promise is to materially benefit or advance the promisor’s business interests.  In such a case, an oral promise to pay another’s debt can be enforced.

The court declined to apply the main purpose exception here.  It noted that the brokers’ commission payments totaled less than $70K on a 10-year lease worth $1.4M. The large disparity between the commission and total lease payments through the ten-year term cut against the plaintiff’s main- purpose argument.

The plaintiff sued the corporate tenant for failing to return the commission payments to the brokers. Since the tenant and the broker defendants were separate parties, any promise by the tenant to answer for the brokers’ debt had to be in writing (by the tenant) to be enforceable.

The court also upheld summary judgment for the defendant on the plaintiff’s tortious interference count. (See here for tortious interference elements.)  A tortious interference with contract plaintiff must show, among other things, the defendant actively induced a breach of contract between plaintiff and another party.  However, the mere failure to act – without more – usually will not rise to the level of purposeful activity aimed at causing a breach.

The Court found one of the broker defendant’s alleged failure to help secure business permits for the tenant didn’t rise to the level of  intentional conduct that induced tenant’s breach of lease.  As a result, the plaintiff failed to offer evidence in support of the interference prong of its tortious interference claim sufficient to survive summary judgment.

Afterwords:

1/ A promise to pay another’s debt – a suretyship relationship – must be in writing to be enforceable under the SOF;

2/ A contractual relationship won’t give rise to a duty to disclose in a fraudulent concealment case unless there is demonstrated disparity in bargaining power between the parties;

3/ Tortious interference with contract requires active conduct that causes a breach of contract; a mere failure to act won’t normally qualify as sufficient contractual interference to be actionable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Suit to Unmask Nasty Yelp! Reviewer Nixed by IL Court On First Amendment Grounds

With social media use apparently proliferating at breakneck speed, Brompton Building v. Yelp! Inc. (2013 IL App (1st) 120547-U)) is naturally post-worthy for its examination of whether hostile on-line reviews are actionable by the business recipients of the negative reviews.

A former tenant, “Diana Z.”, spewed some invective about an apartment management company where she questioned the management company’s business competence, integrity and people skills; especially as they related to billing and handling tenant rent payments.

The building owner (not the management company; by this time there was new management) sued Yelp!, the online review site, to unearth the reviewer’s identity through a Rule 224 petition for discovery so that it could later sue the reviewer for defamation and tortious interference with prospective economic advantage.  The court found the on-line review consisted of protected expressions of opinion and denied the petition for discovery. The plaintiff building owner appealed.

Result: Affirmed.

Rules/Reasoning:

Rule 224 allows a party to engage in discovery for the singular purpose of ascertaining the identity of one who may be responsible in damages.  The case law applying Rule 224 provides significant protection for anonymous individuals so that there private affairs aren’t intruded on.  The Rule’s mechanics: (1) the petition must be verified, (2) it must say why discovery is necessary, (3) it must be limited to determining the identity of someone who may be responsible in damages to the petitioner; and (4) there must be a court hearing to determine that the unidentified person is in fact possibly liable in damages to the petitioner.   ¶ 13.

The Rule 224 petition must set forth factual allegations sufficient to survive a Section 2-615 motion to dismiss (that is, does the proposed complaint state a cause of action?) in order to successfully seek pre-suit discovery.

In Illinois, defamation suits are defeated by the First Amendment to the US Constitution where the challenged statement isn’t factual (it’s an opinion, for instance) and the action is brought by (1) a public official, (2) a public figure, and (3) actions involving media defendants by private individuals.

There is no defamation for “loose, figurative language” that no person could reasonably believe states a fact. Whether something is sufficiently fact-based to underlie a defamation claim involves looking at (1) whether the statement has a readily understood and precise meaning, (2) whether the statement can be verified, and (3) whether its social or literary context signals that it is factual.  ¶ 20.

Illinois courts also espouse a policy of protecting site defendants like Yelp! from a potential torrent of lawsuits by recipients of negative postings.  In addition, the Federal Communications Decency Act (47 U.S.C. § 230) usually insulates a website like Yelp! from liability for publishing third party comments.

Here, the plaintiff failed to allege actionable defamation against Yelp!  While the court conceded that Diana Z.’s statement that the property manager was a liar and illegally charging tenants were factual on their face, when considered in context – the plaintiff couched her rant in hyperbolic speech – the statements were (protected) expressions of opinion. ¶¶ 29-30.

Since the plaintiff couldn’t make out an actual defamation claim against the anonymous Yelp! reviewer, its petition for discovery was properly denied.

Take-aways:

This is but one of many lawsuits involving vitriolic on-line criticism of businesses. In Illinois, the law is clear that to get a court to order a website operator to unveil an anonymous reviewer’s identity, the plaintiff must make a prima facie showing that the review is defamatory or had a tendency to cause third parties to dissociate from it and take their business elsewhere. Failing that, the court will deny a petition for discovery and the plaintiff will be left without a defendant or a remedy.

Illinois LLC Manager Liability For LLC Contract Obligations – Some Basics

This unpublished case is dated (2011) but still post-worthy for its discussion of the nature of limited liability company (LLC) contract obligations and when someone is privileged to intentionally tamper with an existing contract.

In 6030 Sheridan Road, LLC v. Wright Management, LLC, 2011 IL App. (1st) 093282-U, the plaintiff real estate developer sued defendants – an LLC property owner and its principal – for tortious interference with business relationship after a planned condominium conversion tanked.

The plaintiff sued when the defendants terminated the condo conversion agreement because of their displeasure with the plaintiff’s handpicked real estate broker and marketing firm.

The plaintiff sued claiming the defendants tortiously interfered with plaintiff’s contracts with the broker and marketing firm and caused the plaintiff to breach those contracts.  The trial court granted summary judgment for the defendants.

Held: Affirmed.

Reasons: the court first held that an individual LLC member could conceivably interfere with a contract entered into by that LLC.  The elemental LLC rules relied on by the court:

An LLC is a separate entity from its principal members and can sue and be sued and make contracts in its own capacity.

An LLC is a hybrid form of doing business that combines the advantages of a corporation’s limitation on personal liability with a partnership’s pass-through tax treatment (i.e., the LLC pays no entity level state or federal income tax.)

– The Limited Liability Company Act (the Act) (805 ILCS 180/1-1 et seq.) requires an LLC to have one or more members and is a separate legal entity from its members.

– An LLC can be member-managed or manager-managed and LLC members owe an LLC’s other members a fiduciary duty of loyalty and care. The same holds true for managers of manager-managed companies.

– The debts of an LLC, whether arising in contract, tort, or otherwise, are solely the debt of the LLC; not its managers or members;

– A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.

– An LLC member can only be responsible for LLC debts where: (1) the articles of organization provide for individual liability; and (2) the member has consented in writing.

See 805 ILCS 180/10-10; 180/1-30; 180/15-1, 15-3.

Afterwords:

This case provides detailed discussion of the LLC business entity and the scope of an LLC member’s liability for contract obligations.