LLC Members Not Liable On Void Judgment Entered Against LLC

Downs v. Rosenthal, 2013 IL App (1st) 121406, features an in-depth analysis of the difference between corporate vs. individual liability, the nature of post-judgment proceedings, and appellate procedure.

Facts

Plaintiff sued defendant LLC and its individual members (the Members) for breach of fiduciary duty, breach of contract and a declaratory judgment that plaintiff was a 2.5% stakeholder in the LLC.  The trial court entered a money judgment against the LLC and Members jointly and severally.  The LLC defendant appealed the judgment but the Members did not.

The First District reversed and vacated the judgment, finding that plaintiff wasn’t an owner of the LLC and so wasn’t entitled to a share of the LLC’s profits.  But since the Members didn’t appeal the judgment, plaintiff instituted supplementary proceedings against them.  The trial court quashed the citations because the appeals court reversed the plaintiff’s judgment. Plaintiff appealed.

Held: trial court affirmed.  The voided judgment against the LLC is not enforceable against the Members.

Rules:

The LLC appealed – but the Members didn’t – the trial court’s ruling that plaintiff was entitled to 2.5% of the LLC’s profits over several years.  Usually, a nonappealing defendant can’t benefit from the efforts of an appealing defendant.   ¶ 20.

But the defendant that doesn’t appeal can benefit from a co-defendant’s successful appeal where there is an “interdependence of rights” among them that would make it unfair to allow a judgment to stand against the no appealing defendants. ¶¶ 20, 24.

The plaintiff’s right to the LLC profits was entirely dependent on his ownership interest in the LLC.  Since the appeals court found that plaintiff was not an owner of the LLC, plaintiff wasn’t entitled to any LLC profits.

In Illinois, an LLC is a separate entity from its constituent members and an LLC member or manager is not personally liable for a judgment against the LLC. 805 ILCS 180/10-10(a).  Once the judgment against the LLC was overturned, there was nothing to bind the Members: the Court found it was unfair to allow the plaintiff to enforce the vacated judgment against the Members.   ¶24.

The First District also rejected plaintiff’s res judicata (“a thing already judged”)argument – that the judgment which the Members didn’t appeal was final and so the Members were barred from challenging plaintiff’s attempt to collect on the judgment.

Res judicata, or claim preclusion, attempts to foster closure and finality in litigation.  The doctrine applies where there are successive causes of action and it bars a second action between parties after a previous final judgment on the merits.  It requires (1) a final judgment on the merits; (2) identity of causes of actions; and (3) identical parties in both actions. ¶ 25.

Here, the Court found that plaintiff’s enforcement proceedings were “supplementary” to the underlying judgment and were not, by definition, a second cause of action.  There was only a single action – plaintiff’s lawsuit.  As a result, the Court found that the Members could properly attack the plaintiff’s post-judgment efforts once the appeals court vacated the judgment against the LLC.  ¶ 26.

Take-aways: A defendant that doesn’t appeal a judgment can still benefit from a co-defendant’s successful appeal where there is an interdependence of rights between the two defendants.

However, Downs shows that it’s a perilous practice for one defendant not to appeal a money judgment when his co-defendant does appeal.  In Downs, while the LLC members ended up winning, they ran the risk of having to answer for a judgment that was entered against another party (LLC) and ultimately overturned.

Downs also illustrates that a judgment creditor’s collection proceedings aren’t viewed as separate claims for res judicata purposes.

 

 

 

 

Harvester of Sorrow? (IL Fed. Court Tackles Computer Fraud Case

tape recorder (photo credit: Google Images: www.strangehistory.net)

Fidlar Technologies v. LPS Real Estate Data Solutions, Inc., 2013 WL 5973938 (C.D.Ill. 2013), a high-tech diversity suit, examines internet data “harvesting” and whether it gives rise to Computer Fraud and Abuse Act, 18 U.S.C. § 1030 (CFAA) and common law tort liability. 

The plaintiff developed a computer program that allowed recorder of deeds’ offices from around the country to provide users with public access to real estate records for a fee.  The defendant software company developed a data harvester program that bypassed plaintiff’s protective controls and then captured the real estate data without paying fees.

When plaintiff found out, it brought CFAA claims and state law trespass to chattels claims against the defendant.  Defendant moved to dismiss plaintiff’s claims.

Held: Defendant’s motion to dismiss denied.

Reasons:

The CFAA provides a civil cause of action to a plaintiff injured by computer fraud or hacking.  A CFAA “transmission claim” prohibits a defendant from knowingly transmitting a program (such as a data harvester) without authorization that causes damage to a protected computer.  A CFAA plaintiff must show loss of at least $5,000 in any one-year period.  18 U.S.C. §§ 1030(a), (c).

The Court found that plaintiff sufficiently pled damage, loss and intent under Federal notice pleading rules.  Plaintiff’s claim that defendant’s harvesting activity compromised plaintiff’s software satisfied the CFAA’s damage definition – since it alleged an impact to the “integrity” of the software.  18 U.S.C. 1030(e)(8)(CFAA damage definition). 

Plaintiffs also adequately pled loss of at least $5,000 under the CFAA: plaintiff claimed it spent over $80,000 investigating the extent of defendant’s invasion of plaintiff’s software and in making software repairs and adjustments to prevent further service interruptions.  ¶¶ 7-8; 18 U.S.C. 1030(e)(11)(loss definition).  

Lastly, the Court found the plaintiff’s intentional conduct allegations – that defendant’s intentionally and without permission, used plaintiff’s software – were sufficient under FRCP 8’s “short plain statement” strictures.  ¶ 6.

The Court also sustained (in part) the plaintiff’s trespass to chattel claims.  Trespass to chattel – a sparingly used tort occasionally applied to cyberspace lawsuits – provides a remedy where a defendant intentionally interferes with the plaintiff’s personal property and causes harm to it.  ¶ 9. 

The plaintiff’s trespass to chattel claim based on its computer data wasn’t actionable since electronic public data isn’t physical or private property owned by the plaintiff.  

But plaintiff did make out a trespass to chattels claim with respect to its computer servers.  The servers were sufficiently tangible (or physical) to underlie a trespass to chattels claim.  Plaintiff’s claim that defendant accessed the servers and impaired the servers’ quality, condition and value adequately met the Federal notice pleading standard. ¶¶ 10-11.

Defendant’s Counterclaim

Defendant’s injunctive relief and tortious interference claims were rejected.  The court found that plaintiff’s conduct was privileged under the “honest advice” privilege and the First Amendment Petition Clause.  

The latter privilege applied since the counties with whom plaintiff dealt were all government agencies.  Plaintiff’s statements to the counties concerning the defendant’s unauthorized data mining were protected “petitions” to those counties: plaintiff asked the counties to cut off defendant’s access to plaintiff’s software.  ¶¶ 14-17.

Afterwords:

– Computer Fraud plaintiffs can satisfy notice pleading standards by alleging plausible facts of intent, damage and loss exceeding $5,000;

– Trespass to chattels tort applies to physical computer hardware and servers but not to computer data;

– A business competitor has some latitude to make disparaging statements about a competitor where the statements are substantially true, opinions and not facts or are privileged.

 

Agent of Disclosed Principal in Contract Litigation (Is It A Corporate Or a Personal Obligation?)

 

imageSometimes it’s difficult to determine who the contracting parties are.  A common example is where the contract text names the parties are two corporations but it’s signed by an individual.  Or, the contract signer clearly notes his corporate affiliation (by stating his job title) next to his signature, but the body of the contract states that the parties are individuals (not corporations) or that the signer is personally guaranteeing the corporate obligations.

Yellow Book Sales and Distribution Co. v. Feldman, 2012 IL App (1st) 120069 illustrates the importance of signature line clarity in contracts in determining the responsible party if a contract is breached.

In Yellow Book, the plaintiff sued an officer of a defunct corporation for breach of  several advertising contracts.  The contract was between two corporations – an advertising firm (plaintiff) and a glass company.  The glass company’s President signed the contracts and wrote “President” or “Pres.” next to his signatures.

The contracts’ signature blocks provided that the signer “personally and individually” assumed full responsibility for the contracts and a contract term on the back page also provided that the signer guaranteed the corporate obligations.

After the corporation dissolved (the corporation was in good standing when the contracts were signed), the plaintiff sued the corporate officer individually for unpaid invoices.  After a bench trial, the trial court found for the plaintiff and the officer appealed.

Result:  Affirmed.

Reasoning:

The contract clearly provided in two different places (signature block and the “Terms and Conditions” section) that the defendant was signing both for the corporation and for himself.

Generally, when a corporate officer signs a contract and indicates his corporate status next to his signature, this insulates the officer from personal liability.  ¶ 38. 

This is a manifestation of the agent of a disclosed principal rule – a corporate officer isn’t personally liable on contracts he signs on behalf of his corporate principal/employer.  (¶¶ 38, 48); See 810 ILCS 5/3-402(a)(b) (where organization name is followed by signature of representative, the signature is deemed made in representative capacity).

The contracts’ text stated that the contracting parties were two corporations and the corporate officer who signed the contracts indicated his corporate affiliation (“Pres.”, “President”) next to his signatures.

Still, this wasn’t enough to defeat the clear contract language in two separate locations that unequivocally stated the defendant was personally guaranteeing the corporation’s contract obligations.

Also critical to the First District’s ruling was the bargaining equality element: the defendant was a lawyer and experienced businessman who testified he clearly understood the difference between personal and corporate liability.

There was also trial testimony that showed defendant was given an opportunity to review the contracts before he signed them and the parties had done business together for over a decade.

Lastly, the Court also noted that defendant made no attempt to either cross out the contracts’ guarantee language or insert language that clarified he was signing only for the corporation and not for himself.  ¶¶ 46-48.

Afterwords:

1/ The contract text and signature line should clearly identify the contracting parties and the signature block should reflect who is signing – an individual, a business entity or both.

2/ If the intent is for the contract to bind a business entity only (not an individual), the contract and signature block should say so and the signer should note his job title or corporate affiliation.

3/ If a contracting party wants the signing corporate officer to be responsible along with the corporation, the signature line should make clear that the person signing is doing so on his own (and not just his company’s) behalf.