Category: Torts

Binding LLC to Operating Agreement A Substantive Change in Illinois Law; No Retroactive Effect – IL Court

The summer of 2017 ushered in a slew of changes, to Illinois’ limited liability company statute, 805 ILCS 180/15-1 et seq. (the “Act”).  Some of the key Act amendments included clarifying LLC member rights to access company records, explaining if and when a member or manager’s fiduciary duties can be eliminated or reduced, tweaking the Act’s judgment creditor remedies section, and changing the Act’s conversion (e.g. partnership to LLC or vice versa) and domestication rules.

Q Restaurant Group Holdings, LLC v. Lapidus, 2017 IL App (2d) 170804-U, examines another statutory change – one that binds an LLC to an operating agreement (OA) even where the LLC doesn’t sign it. See 805 ILCS 180/15-5.

The OA is the LLC’s governing document that sets forth each member’s (or manager’s) respective rights and obligations concerning contribution, distribution, voting rights and the like. The OA’s signing parties are typically the LLC members/managers – not the LLC itself.  Legally, this is significant because under privity of contract principles – only a party to a written agreement can sue to enforce it.

2017’s LLC Act changes make it clear that the LLC entity has standing to sue and be sued under the OA regardless of whether or not the LLC signed it.

The plaintiff in Lapidus sued the defendant for various business torts including conversion and tortious interference with contract. The defendant moved to dismiss the suit based on mandatory arbitration language in the OA.  Denying defendant’s Section 2-619 motion, the Court held that since the amended Section 15-5 of the Act worked a substantive change to the former LLC Act section, it didn’t apply retroactively. (The OA in Lapidus preceded the 2017 amendments.)

Rules/reasoning:

Affirming the trial court, the First District examined the dichotomy between procedural and substantive changes to legislation.  Where a statutory amendment is enacted after a lawsuit is filed, the Court looks to whether the legislature specified the reach (i.e. does it apply retroactively?) of the amendment.  Where new legislation is silent on its scope, the Court determines whether a given amendment is procedural or substantive.  If procedural, the amendment has retroactive effect.  If the change is substantive, however, it will only apply prospectively.

A procedural change is one that “prescribes the method of enforcing rights or obtaining redress” such as pleadings, evidence and practice.  A substantive change, by contrast, is one that establishes, creates or defines legal rights.  (¶¶ 15-16; citing to Landgraf v. USI Film Products, 511 U.S. 244, 280 (1994); 5 ILCS 70/4 (Illinois’s Statute on Statutes))

In finding that amended Section 15-5 was a substantive change to Illinois’ LLC Act (and therefore couldn’t be applied retroactively) the court noted the amended statute “established a contractual right” by binding the LLC to an OA it never signed.

Since the plaintiff LLC in Lapidus never signed the OA, the Court couldn’t require the plaintiff to follow the OA’s arbitration clause without substantially altering the LLC’s contract rights.  As a result, the Court held that amended Section 15-5 did not apply to the pre-amendment OA and the plaintiff didn’t have to adhere to the arbitration clause.t have to adhere to the OA’s arbitration provisions. (¶¶ 18-19).

Afterwords:

I. To decide if a statutory amendment applies retroactively (as opposed to only being forward-looking), the court considers whether the change is procedural or substantive.

II. While the distinction between procedural and substantive isn’t always clear, Lapidus stands for proposition a change in the law that alters a parties basic contract rights (such as by making a non-party a party to an operating agreement) is substantive and will only apply in the future.

III.  And though the case is unpublished, Lapidus still makes for interesting reading in light of Illinois’ manifold LLC Act changes.  With so many recent statutory changes (see here_for example), this case likely augurs an uptick in cases interpreting the 2017 LLC Act amendments.

Loss of Earning Capacity and The Self-Employed Plaintiff: What Damages Are Recoverable (IL 4th Dist. Case Note)

The plaintiff in Keiser-Long v. Owens, 2015 IL App (4th) 140612, a self-employed cattle buyer, sued for injuries she suffered in a car accident with the defendant.  The defendant admitted negligence and the parties went to trial on damages.

The defendant successfully moved for a directed verdict on plaintiff’s attempt to recover for lost earning capacity at trial and the Plaintiff appealed.

Reversing, the Fourth District appeals court expanded on the potential damages a personal injury claimant can recover where the plaintiff is self-employed and doesn’t draw a formal salary from the business she operates.

Illinois allows a plaintiff in a negligence suit to recover all damages that naturally flow from the commission of a tort.  Impaired earning capacity is a proper element of damages in a personal injury suit.  However, recovery is limited to loss that is reasonably certain to occur.  Lost earning capacity damages are measured by the difference between (a) the amount a plaintiff was capable of earning before her injury; and (b) the amount she is able to earn post-accident.

Lost earning capacity damages focus on an injured person’s ability to earn money instead of what she actually earned before an injury.  That said, a plaintiff pre- and post-accident earnings are relevant to a plaintiff’s damages computation.  ¶ 37.

Where a plaintiff is self-employed, a court can consider the plaintiff’s company’s diminution of profits as evidence of a plaintiff’s monetary damages where the plaintiff’s services are the dominant factor in producing profits.  By contrast, where a self-employed plaintiff’s involvement is passive and she relies on the work of others to make the company profitable, a profits reduction is not a proper damage element in a personal injury action.

The trial court granted the defendant’s motion for directed verdict since the plaintiff failed to present evidence that she lost income in the form of a salary or bonus from her cattle-buying business.

The appeals court reversed.  It noted that the plaintiff was solely responsible for her company’s profits and was the only one who travelled around the State visiting various cattle auctions and meeting with cattle sellers.  Plaintiff also offered expert testimony that she missed out on the chance to earn some $200,000/year in the years following the accident and that any company profits were labeled “retained earnings” and treated as the plaintiff’s personal retirement plan  ¶¶ 41-43.

The court held that since the plaintiff was the only one whose efforts dictated whether her cattle buying business was profitable or not, her business’s post-accident balance sheet was relevant to her recoverable damages.

The court also rejected the defendant’s argument that since plaintiff’s company was a C corporation (and not an S corp.1), profits and losses did not flow through to the plaintiff, the court should not have considered lost business income as an element of plaintiff’s damages.  The court found that any tax differences between C and S corporations were irrelevant since plaintiff was the cattle company for all intents and purposes.  As a result, any loss suffered by the company was tantamount to monetary loss suffered by the plaintiff.  ¶¶ 45-46.

The court’s final reason for reversing the trial court was a policy one.  Since the plaintiff’s corporation couldn’t sue the defendant, there was no potential for double recovery.  In addition, if the court prevented the plaintiff from recovering just because she didn’t earn a formal salary, this would operate as an unfair windfall for the defendant.  The end result is now the parties must have a retrial on the issue of plaintiff’s lost earning capacity.  ¶¶ 46-47.

Afterwords:

Owens provides a useful synopsis of when impaired earning capacity can be recovered in a personal injury suit.  In the context of a self-employed plaintiff, a plaintiff’s failure to draw a salary per se will not foreclose her from recovering damages; especially where the plaintiff – and not someone working for her – is the one mainly responsible for company profits.  In cases where the plaintiff is self-employed and is singularly responsible for a company’s profits, a loss in business income can be imputed to the defendant and awarded to the business-owner plaintiff.

———————————–

1  A C corporation is taxed at both the corporate level and at the shareholder level.  By contrast, an S corporation is not taxed at the corporate level; it’s only taxed at the shareholder individually. (This is colloquially termed “flow-through taxation.”)

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.