Paul Porvaznik – Business Litigator – Page 151 – Case Notes and Summaries of Recent Cases (State and Federal Courts

Single-Page Spreadsheet Doesn’t Satisfy Business Records Rule (Illinois 2nd Dist.)

In In Re Estate of Good, 2013 IL App (2d) 120875-U, the Second District strictly construed the business records hearsay exception and held that a single-page spreadsheet (the “Spreadsheet”), prepared specifically for litigation by one of the parties from various print and electronic sources, didn’t satisfy the business records admissibility rules.

Facts: The plaintiff real estate auction company sued its deceased founder’s estate alleging the founder misappropriated company funds totalling about $1.5M over a multi-year period. Good, ¶ 4. The Plaintiff’s key piece of evidence – the Spreadsheet – was prepared specifically for the litigation and supposedly summarized various company financial records and itemized the amounts decedent allegedly took from the company.

The trial court granted the defendant estate’s summary judgment motion on all complaint counts.

Held: Affirmed.

Q: Why?

A: The Spreadsheet was inadmissible hearsay under the prevailing business records rules:

– Evidence which is inadmissible at trial is not admissible in support of or opposition to summary judgment motion;

– Illinois Evidence Rule 803(6) provides that “records of regularly conducted activity” are exceptions to the hearsay rule as long as they consist of a record or data compilation in any form made at or near the time from information transmitted by someone with knowledge if (a) kept in course of regularly conducted business activity and (b) if it was the regular practice of that business activity to make the record or data compilation;

– A business records proponent must also lay a foundation for the records. To authenticate a document, the party must offer evidence that shows the document is what the party claims it to be;

– A business record’s evidence foundation requires proof that the record (1) was made in regular course of business and (2) made at or near the time of the event or occurrence;

– The foundation for admitting business records can come via affidavit or trial testimony of a records custodian or other person familiar with the business and its mode of operation;

– A summary print-out prepared specifically for trial can satisfy business records rule (and be admissible) IF the underlying data on which the summary is based are (i) kept in regular course of business, (ii) the data was entered contemporaneous to the event, and (iii) there’s nothing to indicate the source of the information is untrustworthy.

Application:

The Spreadsheet didn’t satisfy the business records exception. First, it was mathematically inaccurate: the numbers didn’t match up. Also, plaintiff’s witnesses admitted in depositions that Spreadsheet was cobbled together from different electronic and printed sources – but they couldn’t specifically identify the sources. ¶¶ 67-70.

Also, the Spreadsheet wasn’t itself a business record: it was a “one-shot” summary document prepared for the summary judgment motion at the direction of a plaintiff and was “essentially created from scratch.” ¶ 70.

The Court also held that plaintiff failed to lay a proper foundation for the other financial documents (aside from the Spreadsheet) to support its claims.

The Court pointed to the records custodian’s deposition testimony where he couldn’t specifically identify any documents that supported plaintiff’s damage claims and offered only vague testimony about check requests and invoices that he supposedly reviewed. ¶ 74.

Take-aways:

Good illustrates that numerical accuracy is important when seeking summary judgment on damage claims.

A summary of damages document can meet the business records test – but only if the underlying data is regularly recorded and entered by someone with knowledge of the recorded event.

Good also shows that it’s vital for a deponent (or affiant) to sufficiently identify and explain the underlying data that underlies a damages summary. It’s clear that the conflicting testimony from plaintiff’s agents concerning the underlying Spreadsheet information played an important rule in the Court excluding plaintiff’s evidence.

Priority Dispute Central: When a Bank and Creditor Both Vie for the Same Account Holder Funds

Banks and their commercial customers often enter loan agreements which give the bank the right to set-off or “swipe” the customer’s account if the customer defaults on a loan. The boilerplate loan documents will typically list as a default event, a judgment creditor of the customer attempting to attach the account funds.

The loan and security agreement will also give the bank “first dibs” on those funds: the bank can liquidate the account and apply the funds to the customer’s outstanding loan balance. This creates a classic priority dispute: the judgment creditor wants the customer’s account (because that is likely the only hope for recovering any monies) while the bank wants the same funds so it can salvage its loan rights.

One CW, LLC v. Cartridge World, 661 F.Supp.2d 931 (N.D.Ill. 2009) involves a priority dispute in a franchise suit. The plaintiff, a prospective franchisee, sued and obtained an arbitration award against the seller and entered the judgment (about $360K) in Federal court. The plaintiff then issued a third-party citation against the defendant/seller’s bank and sought turnover of over $81K held in the defendant’s bank account. The bank claimed priority to the entire funds pursuant to both a UCC filing against the defendant’s assets and under Code Section 12-708 which governs a third party citation respondent’s set-off rights. 735 ILCS 5/12-708.

In finding for the plaintiff creditor, the Court harmonized the various Illinois Code sections and some cases that govern post-judgment or supplementary proceedings. See 735 ILCS 5/2-1402 (governs citation proceedings); SCR 277 (same). The key rules:

– a judgment lien is created in a judgment debtor’s nonexempt assets upon proper service of a citation. Section 2-1402(m);

– citations may be served upon the judgment debtor or a third party (usually a bank) that has personal property of the debtor in its possession. 2-1402(m)(2);

– the citation lien that’s created upon service of a citation doesn’t affect the rights of citation respondents in property prior to service of the citation. 2-1402(m);

– a third party who violates the citation restraining provision (by not freezing the account, e.g.), can have judgment entered against it for – lesser of – unpaid judgment amount or in the amount of any property transferred. 2-1402(f)(1);

– a third-party citation respondent has a right to clam all set-offs against the judgment creditor that it could assert against the debtor and must hold, subject to court order, any non-exempt property of the debtor in the respondent’s possession. 12-707(a);

– the third-party respondent must also file a written answer (to the garnishment interrogatories) under oath, that states any property or indebtedness due or to become due the debtor in the third party’s possession or control. 12-707(b);

– a third-party respondent can exercise its set-off rights and deduct from a debtor’s deposit account amounts owing on a note even if the note is not yet due;

– the bank does not have to first proceed against an account holder’s collateral securing the loan before exercising its set-off rights.

pp. 934-936.

Applying these rules, the Court found that the third-party respondent bank failed to properly assert its prior security interest rights by unfreezing the debtor’s assets without court approval and by taking no action to foreclose on its security interest in the debtor’s bank account.

The Court also held that the bank lost its set-off rights by failing to comply with the third-party citation. The Court pointed out that the bank failed to take any steps to exercise its set-off rights such as accelerating the debtor’s defaulted loan and also failed to properly freeze the debtor’s account as required by the text of the third-party citation order and Section 2-1402(f)(1) and 2-1402(m).

Take-aways:

Creditor’s counsel should be leery of Section 12-708’s set-off provision and the caselaw’s expansive application of a third-party’s set-off rights. If a bank has a prior loan to an account holder/debtor, it can likely claim a set-off in the amount in default. It seems the best you can do as a creditor attorney in this situation is to have the bank prove that it is swiping the debtor’s funds and actually crediting the funds against the loan balance.

From the third-party respondent/bank’s vantage point – it should exercise all security interest rights by taking possession of a debtor’s collateral and applying the account funds to the outstanding loan balance. The responding bank should also timely and properly answer a creditor’s garnishment interrogatories and immediately assert its set-off rights in the debtor’s account funds.

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Lost Profits and Breach of Contract Damages: Illinois Law

In Santorini Cab Corporation v. Banco Popular, 2013 IL App (1st) 122070, the plaintiff cab company sued a bank for breaching two contracts to transfer taxicab medallions totalling $96,000 ($48,000 each). The plaintiff sought damages for lost profits (profits it would have earned had the bank transferred the medallions) and the increased value of the medallions as of the trial date.

After a bench trial, the court entered judgment for the cab company but in an amount (about $40,000) much lower than the company sought. The trial court previously entered partial summary judgment for the bank and excluded plaintiff’s lost profits evidence as a discovery sanction. The court also ruled that the proper measure of plaintiff’s damages was the difference between the medallions’ contract price and their value on the date of breach (2007); not on the trial date (2011). The cab company appealed.

Holding: Trial court affirmed.

Reasons: The trial court properly barred the plaintiff from offering lost profits evidence. The Court noted that plaintiff repeatedly failed to respond to defendant’s discovery requests for information to support plaintiff’s claimed damages.

Lost Profits Standards and Discovery Sanctions

Under Illinois law, lost profits can be awarded as long as there is a sufficient basis to estimate them with reasonable certainty. Lost profits won’t be awarded where the proof is remote or speculative. (¶¶ 18-19). The plaintiff has the burden of proving lost profits by presenting a reasonable basis for their computation. A common source of lost profits evidence is a plaintiff’s track record of past profits as a gauge of what future profits would have been (if there was no breach of contract).

Here, the plaintiff didn’t meet its burden of proving lost profits. Since the plaintiff failed to comply with defendant’s lost profits discovery on multiple occasions, the trial court properly struck plaintiff’s damage claims as a discovery sanction under Supreme Court Rule 219.

Rule 219 gives the trial court wide latitude to impose discovery sanctions, including barring a non-complying party from offering evidence on issues sought by the ignored discovery requests. (¶¶ 21-22).

Contract Damages – From When to When?

The Court also affirmed the trial court’s damage award of $37,550 which consisted of the difference in the (a) contract price of each medallion ($48,000) and (b) the medallion’s value on the date of breach ($66,775).

Breach of contract damages seek to put the plaintiff in the position he would have been in had the contract been performed, but not in a better position. Contract damages should not provide plaintiff with a windfall. (¶ 26).

In a personal property case, the measure of damages is the difference between the contract price and the market price of the item at the time of breach. ¶ 27. But where there is no market for the item, this rule doesn’t apply. Instead, the damage amount is “actual loss” to the buyer as shown by the evidence. (¶¶ 26-27).

Here, there was a definite market for cab medallions. The evidence was that there were thousands of cab medallions bought and sold over a 3 1/2 year period preceding the trial date and several medallions were sold the month of the bank’s breach. The Court found that the trial court properly averaged the sale price of medallions sold in Chicago during the month and year of breach (Feb. 2007) and sustained the lower court’s damage award for the plaintiff.

Take-aways:

Santorini provides a nice gloss on contract damages and lost profits requirements in the personal property context. It clarifies that contract damages involving personal property are measured on the date of breach; not a later trial date. This case also shows how crucial it is to timely and properly answer discovery requests on damages issues; especially if you have the burden of proof at trial.

It’s crucial for parties to vigilantly update discovery responses – especially on damage computations – so they aren’t barred from offering damages evidence at trial.

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