Lawyer’s Breach of Fiduciary Duty and Constructive Trust Claim Against Ex Law Partner Barred By 5-Year Statute of Limitations

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Jimmy Connors is one of my all-time favorite tennis players and professional athletes.  Not just because he was such a fiery competitor who seemed to literally spill his blood and guts every time he took the court.  But because of his racket.

In an era dominated by space-age racket technologies like Kevlar, ceramics and various graphite-fiberglass amalgams, Connors stuck with his trusty Wilson T2000 – a primitive piece of steel with a wrap-around string aesthetic and microscopic sweet spot.  

There was just something about seeing the consummate throwback Connors, and his anachronistic Tool of his Trade,  continually vanquish a parade of younger adversaries with their ultra-modern tennis accoutrements that resonated with the purist in me.

That’s why Brennan v Constance, 2014 IL App (5th) 110555-U (2014), a lawsuit involving two former law partners fighting over legal fees owed by the tennis legend, naturally piqued my interest.

Facts:

The plaintiff and defendant was ere law partners in a three-person firm (the Firm).  Connors was a long-time Firm client.  

When the Firm disbanded, a major sticking point was fees owed the Firm by Connors for previous services.  Defendant believed the fees were his (since Connors was originally his client) while the other Firm members viewed the Connors fees owed to the Firm.

After more than a decade of litigation, Connors paid nearly $11 million to the Firm.  Defendant received nearly $7 million, while a former Firm partner got about $4M.

Plaintiff sued to impose a constructive trust over a portion of the $7 million in fees recovered by defendant because plaintiff believed defendant misled him concerning the amounts owed from the tennis great.

After a three-week bench trial, the Court entered judgment in plaintiff’s favor and imposed a constructive trust on the fees and awarded plaintiff more than $1.64 million – an amount equal to 25% of the Connors fees paid to defendanT.

Held: trial court reversed.  Plaintiff’s suit is time-barred.

Rules/Reasoning:

Plaintiff’s suit was barred by the five-year statute of limitations governing breach of fiduciary duty claims. 

Code Section 13-205’s five-year limitations period governs constructive trust and fiduciary duty claims.  ¶ 60, 735 ILCS 5/13-205.  A statute of limitations starts running when the cause of action accrues (when facts exist which authorize bringing the action).  

The “discovery rule” tolls (stops) the running of a limitations period until an injured plaintiff knows or should know he has been injured. 

Fraudulent concealment of a claim also tolls the limitations period.  ¶ 61.  In “passive” concealment cases, the plaintiff must show that defendant concealed a material fact that he was under a duty to disclose.  ¶ 63.   However, a plaintiff who knows he has been injured has a duty to investigate further and the limitations period will run when the plaintiff is put on “inquiry notice.”  A plaintiff doesn’t have to know the full extent of his injuries before the statutory clocks start ticking.

In reversing the plaintiff’s judgment, the 5th District found the plaintiff was on inquiry notice as early as 2004 (when he admittedly first learned of an aborted stock transfer that would have netted the Firm millions) but didn’t sue until 2010.  Since plaintiff missed the five-year limitations period, his suit was too late.

The Court also rejected plaintiff’s fiduciary duty argument: that since defendant owed plaintiff a fiduciary duty as a former law partner, it relaxed the limitations period.  The Court disagreed.  It held that while a fiduciary relationship may excuse an initial failure to investigate, it won’t lengthen the time to sue where a plaintiff knows of possible wrongdoing and fails to act on it.  ¶¶ 70-71.

Afterwords: This case illustrates the harsh results for  litigants who sits on their rights.  While a fiduciary relationship can bolster a fraudulent concealment argument and toll a limitations period, if facts exist that should put a reasonable person on inquiry notice of a wrongful act, the limitations period will run from the date of that notice.

 

Rescission Based On Mistake and Fraud: An IL Case Note

Blackhawk State Bank, Inc. v. Al’s Motorhome and Trailer Sales, Inc., 2013 IL App (2d) 130316-U (2013), illustrates in stark relief the perils of entering high-dollar “handshake” real estate contracts.  

The plaintiff bank sued to foreclose on farm land after a borrower (the “Seller”) defaulted on a multi-million dollar loan.  The loan was used to fund the Seller’s mobile home business. 

But before the bank’s foreclosure suit, the Seller “sold” the property to defendant for $825,000 as part of a handshake agreement.  The Seller never told defendant about the bank’s nearly $7M mortgage on the land and the defendant never asked. 

The defendant also never ordered a title search and didn’t check tax records either.  He took the Seller’s word on all aspects of the deal and no written contract was prepared to document it.

Defendant paid the Seller $825,000 to buy the farm land in two installments.  But instead of crediting defendant’s payments to the purchase price, the Seller – used the funds to pay down the mortgage held by the plaintiff.

When defendant learned of the bank’s mortgage on the property, he sought the return of his first $425,000 payment.  The bank said no and filed a foreclosure suit because the underlying loan was by that time in default. 

The defendant counter-sued for unjust enrichment and rescission based on mistake and fraud.  The trial court dismissed the defendant’s rescission claims on the bank’s motion to dismiss and on the unjust enrichment claim, entered judgment for the bank after a bench trial. Defendant appealed.

The defendant’s unjust enrichment claim failed because he couldn’t show that he had a superior right over the bank to the $425,000 in purchase funds. 

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

In situations where the benefit flows from a third party, unjust enrichment applies where the plaintiff has a better claim to the benefit than the defendant.  ¶¶ 15-18.

The Court found that the bank had a “better claim” to the sale proceeds than did defendant.  This was because the bank had no knowledge of defendant’s handshake deal with the Seller and the bank was owed millions of dollars from the bankrupt Seller. 

The Court also focused on defendant’s own negligence in not performing any due diligence concerning the property and exhibiting a “lax approach” to a high-dollar transaction with a complete stranger seller.  ¶¶ 30-33.

The court also upheld the dismissal of defendant’s rescission claims.  To state a claim for rescission premised on mistake, a plaintiff must show: (1) a serious and material mistake, (2) the mistake is so important that enforcement of the contract would be unconscionable; (3) the mistake occurred even though the party claiming rescission exercised due care; and (4) rescission can place the parties in the status quo.   ¶ 44.

The Court rejected defendant’s rescission-due-to-mistake arguments because defendant couldn’t establish that he exercised due care in the transaction.

The defendant land buyer failed to perform even rudimentary research on the property that would have shown the bank’s multi-million dollar mortgage lien.  This precluded a finding that defendant made a mistake that merited undoing the contract. ¶¶ 45-47.

The defendant’s fraud-based rescission claim – based on the Seller falsely telling defendant he owned the property free and clear – also failed.  The defendant couldn’t establish that he reasonably relied on the Seller’s statement.  Since defendant entered into a significant real estate transaction with (figuratively) eyes closed, he couldn’t plead or prove the reasonable reliance element for rescission based on fraud. ¶¶ 48-49.

Afterwords: Blackhawk shows how critical the “due care” element is for both a valid unjust enrichment and rescission claim.  If a litigant is unable to show that he exercised reasonable care in a transaction, his chances of undoing a transaction (rescission) or getting monies returned to him (via unjust enrichment) are slim to none.

 

Employee Sues After Employer Hijacks Personal Twitter and Facebook Accounts (the ‘With Friends Like These…’ Post)

The case is dated (2011) but interesting.   The salient issues in Maremont v. Fredman, 2011 WL 6101949 (N.D.Ill. 2011), have enduring relevance in this culture of omnipresent electronic commerce and social media use.  The case is also post-worthy for its discussion of state law privacy and publicity torts in a computerized factual setting.

Plaintiff was director of marketing for the defendant interior design firm where she was in charge of formulating and executing the firm’s social media marketing efforts.  After she was hospitalized in a serious car crash, plaintiff alleged someone from the design firm accessed her personal Facebook and Twitter accounts and sent promotional messages to plaintiff’s Twitter and Facebook followers/friends.  Plaintiff filed suit against the design firm and its principal officer under the Federal Lanham Act (15 U.S.C. § 1125)  and Stored Communication Act (18 U.S.C. § 2701) and also for violating the Illinois Right to Publicity Act (765 ILCS 1075/60) and for common law intrusion on seclusion.  The parties moved for summary judgment on all claims.

Result: The Court denied both parties’ summary judgment motions on plaintiff’s Lanham Act (a false association claim) and Stored Communication Act claims.  The Court granted summary judgment for defendants on plaintiff’s state law publicity and privacy claims.

Rules/Reasoning:

The Court denied both parties’ summary judgment motions on Plaintiff’s false association claim.  Also called  false endorsement, an action for false association lies where a person’s identity (including likeness, voice, or other unique characteristics) is impermissibly connected with defendant’s product or service in such a way that consumers get the impression that plaintiff sponsors or endorses defendant’s products or services.  A false association/endorsement plaintiff must show she has a reasonable interest to be protected and an intent to commercialize her identity.  Otherwise, anonymous persons with no ability to monetize their identity could conceivably sue for false association.  The plaintiff must also prove actual economic damages (e.g. lost sales, profits, good will) resulting from the consumers’ reliance on defendant’s misleading statements or conduct.  Maremont, *4.

Here, the Court did find that plaintiff had a well-known name in the design community and therefore had a protectable commercial interest in her identity.  But because discovery wasn’t complete on the damages issue, it was premature for the Court to enter summary judgment for either party on the false association count.

Update: On March 3, 2014, the Court granted defendants’ summary judgment motion on Plaintiff’s false association claim.  Plaintiff’s Stored Communications Act claim survived summary judgment and the parties are going to trial on that count.

Plaintiff’s Stored Communications Act (SCA) claim also survived summary judgment because of unresolved fact disputes.  A Federal statute aimed at protecting against computer hackers, the SCA creates a private cause of action against a defendant who intentionally accesses (either without authorization or after exceeding authorization) and  alters or obtains plaintiff’s stored electronic communications (e-mail, e.g.).  Maremont, *5, 18 U.S.C. § 2701.

Plaintiff established that her Twitter and Facebook accounts belonged to her even though she signed up for both accounts at defendants’ office and on its computer equipment.  Since defendants clearly were able to access and send promotional tweets and Facebook messages from plaintiff’s personal accounts, there was a triable fact question as to whether defendants exceeded their authority to access those accounts.

In her state law right to publicity count, plaintiff asserted that the design firm  – by sending marketing messages from plaintiff’s social media accounts – used plaintiff’s likeness to promote defendants’ business.  A statutory publicity act claim requires a plaintiff to plead and prove (1) an appropriation of one’s name or likeness; (2) without written consent; (3) for another’s commercial benefit.  765 ILCS 1075/60; Maremont, *6.  Plaintiff’s right of publicity claim failed because she couldn’t establish element (1): that defendants pretended to be plaintiff when they sent messages from plaintiff’s Twitter and Facebook accounts.  Defendants clearly made it known that plaintiff was injured and that defendants, not plaintiff, were sending the promotional electronic missives.  Maremont, *7.  As a result, since defendants weren’t passing themselves off as plaintiff when they sent the messages, the defendants didn’t misappropriate plaintiff’s identity or likeness.

Defendants also defeated plaintiff’s intrusion on seclusion claim.  A species of the right to privacy tort, an actionable intrusion on seclusion claim requires a plaintiff to show (1) an unauthorized intrusion into seclusion; (2) intrusion that is highly offensive to a reasonable person; (3) the matter intruded upon was private; and (4) the intrusion caused the plaintiff anguish and suffering.  The plaintiff must also demonstrate that she attempted to keep private facts private.  And if something is displayed openly, there is no reasonable expectation of privacy under the law.  Maremont, *7.

Here, because plaintiff had so many Twitter (more than 1,200) and Facebook followers and frequently invited her followers to visit the design firm’s website and also linked to the firm’s public site and blog, the Court found that plaintiff didn’t try to keep any facts private.  Since plaintiff couldn’t point to any private information which defendants intruded on, the intrusion on seclusion claim failed.  Maremont, *7.

Afterwords: According to PACER, the Federal court public access portal, the case is still going.  Defendants have now moved five separate times for summary judgment.  Substantively, the case is relevant because it posits that a Twitter account is property of the individual account holder even though it was opened on employer premises and using employer equipment.  Maremont also demonstrates that a party’s commercial interest in her name and reputation and her private electronic communications are legally protectable interests under Federal and state law.