Online Merchant Has No Duty to Protect Victims From Criminal Acts – Seventh Circuit 8.12.14

armslistThe Seventh Circuit recently examined the nature and scope of the legal duty owed by an Internet retailer to prevent a criminal attack on a third party.  In Vesely v. Armslist, LLC, (http://docs.justia.com/cases/federal/appellate-courts/ca7/13-3505/13-3505-2014-08-12.pdf) the plaintiff filed a wrongful death suit on behalf of his sister who was murdered by someone who purchased a handgun on Armslist.com (http://www.armslist.com), an electronic “firearms marketplace” that brokers gun sales between private parties.

The assailant (now serving a life sentence and not party to the civil suit) bought a gun off of Armslist from a private seller in Seattle, Washington.  He later shot the plaintiff’s sister after she spurned his (the gun buyer’s) advances.  Plaintiff sued the website operator, alleging wrongful death (predicated on negligence), statutory survival and a family expense claims.  All of plaintiff’s claims were premised on the allegation that the defendant had a duty to protect third parties from the criminal acts of users of the website.  The District court found there was no duty and granted the defendant’s motion to dismiss (12(b)(6) motion)).  The plaintiff appealed.

Held: Affirmed.  Gun selling site owes no duty to control the conduct of on-line purchasers.

Reasons:

The website operator didn’t owe the plaintiff a duty to protect third parties from the criminal acts of gun buyers.  In Illinois, the essential negligence elements are a duty of care owed by a defendant to the plaintiff, violation of that duty and an injury resulting from the violation.  Breach of duty and proximate cause are fact questions for a jury while the existence of a duty is a matter of law for the court to decide.

A private individual normally doesn’t owe a duty to affirmatively protect another from a criminal attack unless there is a ‘special relationship’ between the parties.  The four categories of special relationships are: (1) common-carrier and passenger (i.e. a train); (2) innkeeper and guest (i.e. hotel); (3) custodian-ward; and (4) business invitor and invitee.  (Armslist, p. 5).

Aside from the special relationship duty rule, courts can find a legal duty on public policy grounds.  The public policy factors that inform the court’s duty calculus are (1) reasonable foreseeability of the injury; (2) likelihood of the injury; (3) the magnitude of the burden of guarding against the injury; and (4) the consequences of placing the burden (of guarding against the injury) on the defendant. (p. 6).

A defendant also has a duty to refrain from “affirmative conduct” that creates a risk of injury to others and from actively assisting someone’s wrongful act.  But where the act that causes harm is criminal conduct (like the murder, here), there must be a special relationship for liability to attach. (p. 6).

The Court found the Armslist web operator had no legal duty to the plaintiff or his sister.  Since the operative act was a crime – a shooting – the special relationship rule applied.  The Court made a distinction between actively assisting gun buyers’ to commit crimes and simply serving as conduit for on-line gun purchases.  Since the defendant merely enabled consumers to use its site to buy guns, this didn’t equate to actively encouraging the buyers to commit illegal acts.  (p. 7).  And since there is no special relationship involving on-line merchants and consumers, there was no duty as a matter of law.

To bolster its holding, the Seventh Circuit noted that the Armslist site is a legal service and that the site contains profuse disclaimers that require the user’s acknowledgement that the defendant isn’t responsible for looking into whether parties to the on-line transaction have legal capacity to buy and sell guns.  Armslist’s standard terms also require the gun advertiser to certify that he/she will obey all applicable gun laws and will consult the ATF with firearms questions. (p. 2).  In light of these disclaimers and because there was no special relationship between Armslist and any of its users’ future crime victims, plaintiff was unable to establish that the defendant website operator owed a legal duty.

Afterwords:

A victory for on-line merchants who traffic in dangerous things and a corresponding  loss for gun control advocates.  The Court refused to saddle a classified advertising site with a legal duty to unknown third parties.  The Court enforced the defendant’s clear disclaimers that emphasized that it was not vetting either the gun seller’s or buyer’s qualifications for gun purchases or any red flags in their personal histories.

The Court solidifies the negligence law proposition that the existence and reach of a duty has limits – especially in the Internet sales context. If there is no recognized special relationship, there is no legal duty to protect against intervening criminal acts.

 

Illinois Appeals Court Provides Partnership Primer

DeSouza v. Tradelink, LLC, 2014 IL App (1st) 131456-U provides an excellent – though unpublished – primer on Illinois partnership law and contract interpretation rules. The case also illustrates the confusion that can result when parties to a business deal have several conflicting and parallel documents that govern a single transaction.

Plaintiff entered into a four-way business arrangement with a software developer, another individual and a trading firm to share profits from a unique software trading module invented by the developer.  Three documents governed the parties’ relationship.   A Term Sheet, a Trader Agreement , a Side Letter (which contained a separate rider) codified the parties venture and assigned each participant’s profits split. The plaintiff, who introduced the software developer to the trading firm, was to receive 5% of all trading profits realized by the developer (who was to be paid 55%) from the software. The payments to the plaintiff were to flow through the developer who would pay plaintiff his share after he (the developer) was paid by the trading company.

When the trading firm severed ties with the developer, the plaintiff sued to recover several million dollars in profits that the company earned over several years based on its use of the trading software. The trial court granted summary judgment for the trading firm on plaintiff’s claims on the basis that no partnership was formed between the parties.  Plaintiff appealed.

Held: Reversed. Questions of fact exist as to whether the parties intended to form a partnership.

Rules/Reasoning:

The Uniform Partnership Act (810 ILCS 206/100, 202(a))(the UPA) defines a partnership as the association of two or more persons to carry on as co-owners a business for profit – regardless of whether that was the persons’ intent. The sharing of gross revenues by 2 or more people doesn’t establish a partnership by itself but where a person receives a share of business profits, he is presumed to be a partner unless he was paid (a) wages as an employee or (b) compensated as an independent contractor. UPA Section 206/202(c); (¶21).

Illinois courts describe a partnership as a contractual relationship and a partnership is controlled by the parties’ oral or written agreement. The caselaw echoes the UPA and finds a partnership where parties join together to carry on a business venture for their common benefit and each party contributes property or services to the enterprise and has a community interest in the business profits.

Other indices of a partnership include the manner in which the parties deal with one another, the mode in which each alleged partner dealt with third parties with the other partners’ knowledge and whether the two (or more) persons advertised their business using a firm name. (¶ 21).  The Court also looks at whether the business has filed a partnership certificate with the county clerk, whether the business has a checking account and files partnership tax returns as part of its partnership inquiry.  And while the parties’ intent isn’t the decisive factor (in deciding whether there is a partnership), it’s still something the court considers when determining whether a partnership exists. (¶¶33, 42).

The Court reversed summary judgment for the trading company because there were disputed fact questions as to whether the parties formed a legal partnership.  The various documents and the parties’ conduct was both consistent and inconsistent with the existence of a partnership.  The pro-partnership factors included multiple references to the terms “partner” and “partnership” and the fact that plaintiff was assigned a specific percentage of the business arrangement’s profits.

Factors that ran counter to a partnership finding included the plaintiff not contributing property or funding for the business and not having any role in the day-to-day business of the trading firm. that plaintiff didn’t contribute any money to the enterprise, didn’t run the trading business or share in business losses.  Because there were so many factual and textual incongruities in the various documents, it wasn’t clear whether the parties meant to form a partnership.   (¶¶ 22-28)

The other key fact dispute that led to the court’s summary judgment reversal involved plaintiff’s role in the enterprise.  The trial court found that plaintiff was merely a “finder” who connected to developer with the trading company and was entitled to a “finder’s fee.”  But there was evidence in the record that plaintiff expended time , energy and money in consummating the developer-trading firm connection.  Because of this, it was conceivable that the plaintiff contributed property or services to the business venture.  If plaintiff’s time and money efforts were considered contributions of property or services, this would indicate the existence of a partnership.  More facts needed to be developed for the court to rule definitively on the partnership question.  (¶¶ 31-32). 

Take-aways: Confusion results where multiple documents govern the same transaction.  Where multiple agreements control a single transaction, the agreements should incorporate each other by reference and specifically state what document trumps the other(s) if there is a dispute or conflict among the different terms.  The case’s real value, though, lies in its excellent summary of Illinois partnership law under the UPA and the construing caselaw.  De Souza provides a fairly exhaustive summary of the key elements a court considers when deciding whether the parties’ conduct evidences a formal partnership.

 

Corporate Successor Liability: Continuation and Fraud Exceptions (IL Law)

Advocate Financial Group, LLC v. 5434 North Winthrop, 2015 IL App (2d) 150144 spotlights the “mere continuation” and fraud exceptions to the general rule of no successor liability – a successor corporation isn’t responsible for debts of predecessor – in a creditor’s efforts to collect a judgment from a business entity that is twice removed from the original judgment debtor.

The plaintiff obtained a breach of contract judgment against the developer defendant (Company 1) who transferred the building twice after the judgment date. The second building transfer was to a third-party (Company 3) who ostensibly had no relation to Company 1. The sale from Company 1 went through another entity – Company 2 – that was unrelated to Company 1.

Plaintiff alleged that Company 1 and Company 3 combined to thwart plaintiff’s collection efforts and sought the turnover of the building so plaintiff could sell it and use the proceeds to pay down the judgment. The trial court granted the turnover motion on the basis that Company 3 was the “continuation” of Company 1 in light of the common personnel between the companies. The appeals court reversed though. It found that further evidence was needed on the continuation exception but hinted that the fraud exception might apply instead to wipe out the Company 1-to Company 2- to Company 3 property transfer.

On remand, the trial court found that the fraud exception (successor can be liable for predecessor debts where they fraudulently collude to avoid predecessor’s debts) indeed applied and found the transfer of the building to Company 3 was a sham transfer and again ordered Company 3 to turn the building over to the plaintiff. Company 3 appealed.

The appeals court affirmed the trial court’s judgment and in doing so, provided a useful summary of the principles that govern when one business entity can be held responsible for another entity’s debts.

In Illinois, a corporation that purchases the assets of another corporation is generally not liable for the debts or liabilities of the transferor corporation. The rule’s purpose is to protect good faith purchasers from unassumed liability and seeks to foster the fluidity of corporate assets.

The “fraudulent purpose” exception to the rule of no successor liability applies where a transaction is consummated for the fraudulent purpose of escaping liability for the seller’s obligations.

The “mere continuation” exception to the nonsuccessor liability rule requires a showing that the successor entity “maintains the same or similar management and ownership, but merely wears different clothes.” The test is not whether the seller’s business operation continues in the purchaser, but whether the seller’s corporate entity continues in the purchaser.

The key continuation question is always identity of ownership: does the “before” company and “after” company have the same officers, directors, and stockholders?

In Advocate Financial, the factual oddity here concerned Company 2 – the intermediary. It was unclear whether Company 2 abetted Company 1 in its efforts to shake the plaintiff creditor. The court affirmed the trial court’s factual finding that Company 2 was a straw purchaser from Company 1.

The court focused on the abbreviated time span between the two transfers – Company 2 sold to Company 3 within days of buying the building from Company 1 – in finding that Company 2 was a straw purchaser. The court also pointed to evidence at trial that Company 1 was negotiating the ultimate transfer to Company 3 before the sale to Company 2 was even complete.

Taken together, the court agreed with the trial court that the two transfers (Company 1 to Company 2; Company 2 to Company 3) constituted an integrated, “pre-arranged” attempt to wipe out Company 1’s judgment debt to plaintiff.

Afterwords: This case illustrates that a court will scrutinize property transfers that utilize middle-men that only hold the property for a short period of times (read: for only a few days).

Where successive property transfers occur within a compressed time window and the ultimate corporate buyer has substantial overlap (in terms of management personnel) with the first corporate seller, a court can void the transaction and deem it as part of a fraudulent effort to evade one of the first seller’s creditors.