Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.

 

 

Italian Lawsuit Filed Against Auto Repair Giant Dooms Later Illinois Lawsuit Under ‘Same Parties/Same Cause’ Rule

Where two lawsuits are pending simultaneously and involve the same parties and issues, the later filed case is generally subject to dismissal.  Illinois Code Section 2-619(a)(3) allows for dismissal where “there is another action pending between the same parties for the same cause.”

Midas Intern. Corp. v. Mesa, S.p.A., 2013 IL App (1st) 122048, while dated, gives a useful summary of the same-cause dismissal guideposts in the context of an international franchise dispute.

Midas, the well-known car repair company entered into a written contract with Mesa, an Italian car repairer, to license Midas’s business “System” and related trademarks.  In exchange for licensing Midas’s business model and marks, Mesa paid a multi-million dollar license fee and made monthly royalty payments.  The contract had a mandatory arbitration clause and a separate license agreement incorporated into it that fixed Milan, Italy or Chicago, Illinois as the venues for license agreement litigation.

Mesa sued Midas in an Italian court claiming Midas violated the license agreement by not making capital investments in some of Mesa’s projects.  A month or so later, Midas sued Mesa in Illinois state court for breach of contract and a declaratory judgment that Midas was in compliance with the license agreement and was owed royalties.  The trial court dismissed Midas’ suit based on the pending Italian lawsuit filed by Mesa.  Midas appealed.

Held: Affirmed.

Reasons:

The case turned on whether Mesa’s lawsuit stemmed from the same cause as Midas’s Illinois action.  Dismissal of an action under Code Section 2-619(a)(3) is a “procedural tool designed to avoid duplicative litigation.”  Under this section, actions involve the same cause when the relief sought in two cases rest on substantially the same set of facts.  The test is whether the two actions stem from the same underlying transaction or occurrence; not whether the pled causes of action or legal theories in the two cases are the same or different.

Two cases don’t have to be identical for Section 2-619(a)(3) to apply.  All that’s required is the cases feature a “substantial similarity of issues.”  (¶ 13)

If the same cause and same party requirements are met, the Court can still refuse dismissal if the prejudice to the party whose case is dismissed outweighs the policy against duplicative litigation.  In assessing prejudice caused by dismissal, the court considers issues of comity, prevention of multiplicity of lawsuits, vexation, harassment, likelihood of obtaining complete relief in the foreign forum, and the res judicata effect of a foreign judgment in the local forum (here, Illinois).

Courts also look to which case was filed first; although order of case filing isn’t by itself a dispositive factor.

Rejecting Midas’ argument that the Italian lawsuit was separated in time and topics from the Illinois lawsuit, the Court noted that Mesa’s lawsuit objective was to preemptively defend against Midas’s royalty claims.  Midas Illinois lawsuit, filed only weeks after Mesa’s action, sought damages under a breach of contract theory – that Mesa breached the license agreement by not paying royalties.

Since the outcome in the Mesa (Italian) case will determine the Midas (Illinois) case, the Court found the Illinois case was barred because Mesa’s action involved the same parties and same cause: both cases originated from the same license agreement.

The Court also found that Midas wouldn’t be prejudiced due to the dismissal of the Illinois action. Midas has the resources to file a counterclaim in the Italy case and the license agreement provides that either Milan or Chicago are possible lawsuit venues.  Since Illinois and Italy each had similar interests in and a connection to the dispute (the royalty payments were sent from Italy and received in Illinois), the trial court had discretion to dismiss Midas’ Illinois lawsuit. (¶ 25).

Afterwords:

1/ This case lays out the different factors a court considers when determining whether to dismiss an action under the same cause/same parties Code section;

2/ The timing of the filing of two lawsuits along with each forum’s connection to the dispute are key factors considered by the court when deciding whether avoiding redundancy in litigation trumps a party’s right to have its case heard on the merits.

Avvo’s ‘Sponsored Listings’ Not Commercial Enough to Escape First Amendment Protection in Lawyer’s Publicity Suit – IL ND

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In its decade old existence, Avvo, Inc., an “on line legal services marketplace,” has been no stranger to controversy.  Private attorneys and bar associations alike have objected to Avvo’s business model and practices – some filing defamation lawsuits against the company while others have demanded in regulatory venues that Avvo stop its unconsented “scraping” of attorney data.

Vrdolyak v. Avvo, Inc. is the latest installment of a lawyer suing Avvo; this time challenging Avvo-pro, the on-line directory’s pay-to-play service.

For about $50 a month, Avvo-pro users can ensure that no rival attorney ads appear on their profile page.  But if the attorney chooses not to participate in Avvo-pro, he will likely see competitor ads on his Avvo page.

The plaintiff, a non-Avvo-pro participant, sued Avvo under Illinois’ Right to Publicity Act.  He argued that by selling competitor ads on his profile page, Avvo usurped plaintiff’s right to monetize his identity.

In effect, according to plaintiff, Avvo was capitalizing on plaintiff’s brand and using it as a platform for rival lawyers to peddle their services to anyone who visited plaintiff’s Avvo page.

The Court granted Avvo’s motion to dismiss on the basis that Avvo’s ads were protected by the First Amendment to the U.S. Constitution.

The key inquiry was whether Avvo’s site constitutes commercial or non-commercial speech.  If speech is non-commercial, it is entitled to expansive First Amendment protection that can only be restricted in extraordinary circumstances.

Commercial speech, by contrast, receives less First Amendment protection.  It can be more easily scrutinized and vulnerable to defamation or publicity statute claims.

The court cited daily newspapers and telephone directory “yellow pages” as prototypical examples of non-commercial speech.

While both sell advertising, a newspaper’s and yellow pages’ main purpose is to provide information.  Any ad revenue derived by the paper or phone directory is ancillary to their primary function as information distributor.

Commercial speech proposes a commercial transaction, including through the use of a trademark or a company’s brand awareness.  If speech has both commercial and non-commercial elements (e.g. where a commercial transaction is offered at the same time a matter of social importance is discussed), the court tries to divine the main purpose of the speech by considering if (1) the speech is an advertisement, (2) it refers to a specific product and (3) the speaker’s economic motivation.

The Court agreed with Avvo that its site was akin to a computerized yellow pages; That the core of Avvo was non-commercial speech: it provides attorney information culled from various sources.

The court distinguished basketball legend Michael Jordan’s recent lawsuit against Jewel food stores for taking out an ad in Sports Illustrated, ostensibly for commending Jordan on his recent basketball hall of fame induction.

The Seventh Circuit there found that Jewel’s conduct clearly aimed to associate Jordan with Jewel’s brand and in the process promote Jewel’s supermarkets.  As a result, Jewel’s actions were deemed commercial speech and subject to a higher level of court scrutiny. Jordan v. Jewel Food Stores, Inc., 743 F.3d 509, 515 (7th Cir. 2014).

In the end, the Avvo case turned on this binary question: was Avvo a non-commercial attorney directory with incidental advertising, or was each Avvo attorney profile an advertisement for the competitors’ “Sponsored Listings” (the name ascribed to competing attorneys who paid for ads to be placed on plaintiff’s profile page).

Since not every attorney profile contained advertisements and none of the challenged ads used plaintiff’s name, the Court found Avvo was like a newspaper or yellow pages directory entitled to free speech protection.

The Court likened Avvo to Sports Illustrated – a publication that features ads but whose main purpose is non-commercial (i.e. Providing sports news).  Like SI, Avvo publishes non-commercial information – attorney stats – and within that information, places advertisements.

To hold otherwise and allow plaintiff’s publicity suit to go forward, “any entity that publishes truthful newsworthy information about….professionals, such as a newspaper or yellow page directory, would risk civil liability simply because it generated ad revenue” from competing vendors.

Afterword:  This case presents an interesting application of venerable First Amendment principles to the post-modern, computerized context.

A case lesson is that even if speech has some obvious money-making byproducts, it still  can garner constitutional protection where its main purpose is to impart information rather than to attract paying customers.