Statement Assailing Lawyer’s Appearance and Competence Not Factual Enough to Sustain Defamation Claim – Ind. Appeals Court

In Sasser v. State Farm Insurance Co., the Indiana appeals court addressed the contours of defamation law in the context of two statements that variously impugned an attorney’s physical appearance and professional abilities.

The plaintiff, an in-house lawyer for the insurance giant defendant, had a years’ long personality clash with a non-attorney claims adjuster.  The plaintiff alleged the adjuster made many disrespectful comments about the plaintiff including the two statements that drove plaintiff’s defamation suit.

The challenged statements consisted of one concerning the plaintiff’s appearance; the other, her competence as a lawyer.  The Court focused mainly on the latter claims agent’s assertion that “any competent attorney could get a defense verdict” after the plaintiff advised against taking a case to trial to company brass.  The plaintiff argued that the adjuster’s statement was per se defamation since it imputed the plaintiff’s ability to perform as a lawyer.

The trial court disagreed and entered summary judgment for the defendants.  Plaintiff appealed.

Affirming, the court first set forth the general principles of Indiana defamation law.

Defamation requires proof of a factually false statement about the plaintiff, published to a third party that tends to lower one’s reputation in the community or that deters others from associating with the person.

Defamation includes written (libel) and oral (slander) statements.  Two species of defamation law include per se defamation and per quod defamation.  The former applies to statements that are naturally harmful on their face and don’t require a plaintiff to prove special damages.

The four categories of per se defamation are statements that a plaintiff (1) committed a crime, (2) has a communicable disease, (3) is incompetent in trade or profession, and (4) exhibits a lack of integrity in performing employment duties.

Defamation per quod involves a statement that isn’t obviously defamatory but requires extrinsic evidence to establish its defamatory meaning.  To succeed on a defamation per quod claim, the plaintiff must prove actual monetary harm attributable to the challenged statement.

For a statement to be actionable as defamation, it must contain objectively verifiable facts about the plaintiff.  But where the speaker is merely expressing his/her subjective view, interpretation, or theory, the statement is not actionable.  In addition, “[j]ust because words may be insulting, vulgar or abusive words does not make them defamatory.” [22]

Here, the appeals court agreed with the trial court that the two statements under attack did not directly convey a per se defamatory statement about the plaintiff.  While allowing that individual defendant’s comment concerning the plaintiff’s appearance may be offensive, it wasn’t verifiably true or false and so didn’t rise to suable slander.

And while the adjuster defendant’s “any competent attorney” statement arguably implicated per se category (3) – by attributing an inability to perform employment duties – the court found the statement too nebulous to be verified as either true or false.  The Court viewed this statement as the claims agent’s subjective opinion that a competent attorney could secure a certain result after a hypothetical trial.

Rhetorically, the Court asked how would one demonstrate the truth or falsity of such a statement?  It then cited to a late-90s Seventh Circuit decision (Sullivan v. Conway, 157 F.3d 1092 (7th Cir. 1998)) where the Court opined that “to say [plaintiff] is a very poor lawyer is to express an opinion that is so difficult to verify or refute that it cannot feasibly be made a subject of inquiry by a jury.”

The Sullivan case relied on by the Indiana appeals court noted that the caliber of legal representation is inherently uncertain: it noted that excellent lawyers may lose most cases because they take on only challenging ones.  Conversely, according to Sullivan, poor lawyers could win all their cases by only taking easy cases. [25].

What’s more: lawyers have strengths and weaknesses: some are good at some things, while poor at others.   There simply isn’t a way to factually test an opinion concerning a lawyer’s aptitude.  Here, since there was no way to corroborate the statement’s truth or falsity, it wasn’t factual enough to support a defamation claim.

The court also rejected plaintiff’s attempt to bootstrap the “any competent attorney’ statement into a claim that the plaintiff violated Indiana Rule of Professional Conduct 1.1 which specifically speaks to lawyer competence in representation.  The Court found that since the plaintiff didn’t allege either the individual or corporate defendant didn’t say the plaintiff acted unprofessionally or improperly with respect to a specific, discrete legal matter, the plaintiff’s reliance on Indiana’s professional conduct rules fell short.

The court also rejected plaintiff’s per quod argument: that the statement’s defamatory content was established when the  court considered extrinsic evidence.  Because the statement did not impute anything false about the plaintiff that would tend to harm the plaintiff’s reputation, the statement was not defamatory per quod.

Afterwords:

This case illustrates in sharp relief the challenges a defamation plaintiff faces in a culture that vaunts freedom of expression and gives latitude for citizens to “blow off steam” in the private, employment setting.

Sasser also demonstrates that while a statement may be mean, offensive, and vulgar, it still will not rise to the level of actionable defamation if it cannot be objectively tested as true or false.

Qualitative, subjective statements about a lawyer’s abilities do not lend themselves to objective testing.  As a result, in Indiana at least, such statements generally cannot support a defamation claim.

 

 

 

 

Doctor’s Oral Promise to Retire in Future Not Enough To Sustain Healthcare Plaintiff’s Fraud Claims

In Heartland Women’s Healthcare, Ltd. v. Simonton-Smith, 2021 IL App (5th) 200135-U, the appeals court affirmed summary judgment for an obstetrician sued for fraud based on her alleged verbal promise to retire from her practice at the end of a three-year employment term.

The plaintiff claimed the defendant tricked it into buying her practice by promising to retire. The written agreement resulting from the parties’ negotiations contained neither a non-compete term nor a recital that defendant intended to retire at the agreement’s conclusion.

The trial court granted summary judgment for the defendant on plaintiff’s fraud and negligent misrepresentation claims.  Plaintiff appealed.

Affirming, the Fifth District found that the plaintiff failed to produce evidence to support its misrepresentation claims and specifically, to show defendant hatched a “scheme to defraud” the plaintiff.

In Illinois, to state a colorable fraudulent misrepresentation claim, a plaintiff must allege: (1) a false statement of material facts, (2) known or believed to be false by the person making it, (3) an intent to induce a plaintiff to act, (4) action by the plaintiff in justifiable reliance on the truth of the statement, and (5) damage to the plaintiff resulting from the reliance.

A negligent misrepresentation plaintiff must also establish these elements but instead of showing a knowingly false statement, must prove the defendant (i) was careless or negligent in ascertaining the truth of the statement and (ii) owed a duty to the plaintiff to impart accurate information.

In both a fraudulent and negligent misrepresentation claim, the statement must be of an existing or past fact and not merely a promise to do something in the future.  The alleged fraud must also be complete at the time of the challenged statement as opposed to an intention to commit a future fraud.

The ‘Scheme to Defraud’ Exception

Where the false representation of future conduct is the scheme or device employed to accomplish the fraud, a court can restore the parties to the positions they occupied before the fraud was committed.  And while courts make clear that something beyond a lone broken promise is usually required to trigger the scheme exception, that “plus-factor” is still elusive.

Some courts require a plaintiff to allege a sustained pattern of repeated false representations [see HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 131 Ill.2d 145 (1989)] while others [Roda v. Berko (401 Ill.335 (1948), Vance Pearson, Inc. v. Alexander, 86 Ill.App.3d 1105 (1980)] have held that a single promise can trigger the scheme exception.

In cases that have recognized the exception in the single broken promise setting, the plaintiff must generally produce evidence of a  defendant’s contemporaneous intention not to follow through on the promise.   The cases also make clear that whether a plaintiff is proceeding on a course of conduct scheme theory or one that involves only one promise, it must show the defendant’s fraudulent intent existed at or before the time of the promise. [25]

Here, the plaintiff could not prove the defendant promised to retire while, at the same time, never intending to fulfill that promise at the outset.  For support, the Court quoted both plaintiff’s agent’s and defendant’s deposition testimony.  Both testified that while the defendant’s future retirement was discussed prior to inking the three-year pact, it was never reduced to writing.  The plaintiff also could not pinpoint a definite promise by the defendant to retire when the employment contract lapsed.

As further proof that the defendant never unequivocally promised to retire, the plaintiff’s agent testified he even asked the defendant not to retire and that defendant stay beyondthe employment contract’s end date.  In the end, Plaintiff’s evidence did not go far enough to establish either an oral promise to retire at the agreement’s conclusion or the defendant’s intention not to fulfill that promise.

Afterwords:

In finding for the doctor defendant, the Heartland Women’s Healthcare Court was careful to respect the boundary between contract and tort law damages – a delineation that, in theory at least, prevents every broken promise from undergirding a fraud claim.

And while the content and outer reaches of the scheme to defraud exception [to the rule that a false promise is not actionable fraud] is still murky, it seems that something beyond a one-off broken promise is generally required.  A plaintiff invoking the scheme exception has a better chance of surviving a pleadings motion or summary judgment where it can show a defendant’s pattern of repeated broken promises.

Here, the plaintiff alleged only a single misstatement – defendant’s supposed oral promise to retire at the conclusion of the employment contract.  Without evidence of defendant’s contemporaneous intent not to uphold her promise, there wasn’t enough evidence of a scheme to defraud to survive summary judgment.

In hindsight, the Plaintiff should have negotiated and codified both a non-compete provision and defendant’s imminent retirement as material terms of the contract.

 

 

Lumber Exec’s Diversion of Profits to Company Owned by Son Supports Minority Shareholders’ Breach of Fiduciary Duty and Shareholder Oppression Claims – IL 2nd Dist.

Roberts v. Zimmerman, et al., 2021 IL App (2d) 191088-U provides a useful primer on the pleadings and evidence required to sustain a breach of fiduciary duty and shareholder oppression claim against a corporate officer and the contours of the business judgment rule defense to those claims.

The case involved three separate but related lumber buying companies:  Outstanding, Our Wood Loft, Inc. (“OWL”), and Lake City Hardwood (“Lake City”).  OWL is owned 1/3 by the two plaintiffs and 2/3 by the defendant majority shareholder.  Lake City is owned by the majority shareholder’s son.

Plaintiffs’ salient claim was that OWL’s majority shareholder breached his fiduciary duties to the company and minority shareholders by buying lumber from Lake City at a higher price than he could have paid other vendors.  According to the plaintiffs, the net result of the majority shareholder’s actions was a depletion in OWL profits over a multi-year span.  The fact that the director was paying the increased lumber prices to his son’s company created additional bad optics and provided more ammunition for the plaintiffs’ lawsuit.

Plaintiffs’ alleged breach of fiduciary duty and shareholder oppression under Sections 12.56(a)(3)(oppressive conduct) and 12.56(a)(4)(misapplication of corporate funds and/or waste) of the BCA.  Plaintiffs also joined an aiding-and – abetting claims against the majority shareholder’s son and wife.  Plaintiffs alleged these latter defendants were complicit in the majority shareholder’s scheme to enrich his son’s Lake City business to the detriment of OWL.

The trial court dismissed all claims except for the breach of duty claim premised on diversion of profits. After a bench trial, the trial court found in favor of the majority shareholder on this surviving claim on the basis that Plaintiffs failed to prove compensable damages.  Plaintiffs appealed.

Reversing, the appeals court first examined Illinois breach of fiduciary principles in the context of a close corporation shareholder dispute.

Breach of Fiduciary Duty

Corporate officers owe a fiduciary duty of loyalty to the corporation and are precluded from actively exploiting their positions within the corporation for their own personal benefit or impeding the corporation’s ability to conduct the business for which it was formed.

Here, the Court found the majority shareholder owed a fiduciary duty of loyalty to act in OWL’s best interest, to deal on behalf of OWL fairly and honestly, and seek to maximize OWL’s profits.  This duty included ensuring that OWL got the best price for lumber it bought from third parties.

The Court held that the majority shareholder breached his fiduciary duty by paying inflated lumber prices to his son’s company – Lake City.

The Court rejected Defendant’s business judgment rule (BJR) defense.  Under the BJR, courts will not interfere with business decisions of a corporate officer even if it seems that a more prudent decision could have been made.  However, a corporate officer cannot use the rule as a shield for conduct that does not rise to the level of due care.

Here, the court gave the BJR a cramped construction: it found that the rule only applies to honest mistakes in judgment and activities over which a corporate officer has discretion – such as whether an officer spent too much or too little on advertising, salaries, and the like.  The Rule does not apply to situations where challenged conduct subverts the rights of a corporation.  A corporate officer does not have discretion to divert profits from a corporation.

According to the Court, with minimal investigation, the majority shareholder would have discovered that Lake City was profiting at the expense of OWL by selling lumber at inflated prices to OWL.  [¶ 71]

Shareholder Oppression and Aiding-and-Abetting Claims

Reversing the Section 2-615 dismissal of the Plaintiffs’ shareholder oppression and aiding-and-abetting claims, the Court noted that shareholder oppression is not limited to acts that are illegal, fraudulent, or that involve mismanaged funds.  Instead, shareholder oppression applies to a wide gamut of conduct including a course of heavy-handed and exclusionary conduct and self-dealing.

To state a colorable aiding-and-abetting claim in Illinois, a plaintiff must allege (1) the party whom the defendant aids performed a wrongful act that caused an injury, (2) the defendant is generally aware in his or her role as part of the overall or tortious activity at the time or she provides assistance; and (3) defendant must knowingly and substantially assist the principal violation.

Here, Plaintiffs sufficiently alleged enough facts to sustain both claims. The allegations that the majority shareholder overpaid for lumber at OWL’s expense and to his son’s/Lake City’s benefit sufficiently pled an actionable oppression claim.

The Court similarly held that the Plaintiffs adequately pled Lake City’s active participation in the underlying lumber purchasing scheme in the aiding-and-abetting Complaint count.

Afterwords:

Roberts cements the proposition that a majority shareholder’s diversion of corporate profits to another entity can support both a breach of fiduciary duty claim and a statutory shareholder oppression action.

The case also makes clear that shareholder oppression is not limited to acts that are illegal, fraudulent, or that involve mismanaged funds.  Here, Plaintiffs allegation that the majority shareholder used an unnecessary middleman – Lake City – to which the company overpaid for lumber and lost resultant profits – was enough to make out a colorable oppression claim.

Finally, Roberts clarifies that a successful aiding-and-abetting a breach of fiduciary duty claim requires allegations of a defendant’s active participation and knowledge in/of  underlying wrongful conduct.  Constructive knowledge is not enough.