Res Judicata Bars Fraud in Inducement Claim Versus Lawyer Defendant

Eckert v. Levin, 2015 WL 859530 (N.D.Ill. 2015) examines claim preclusion (“res judicata”) in the context of an aborted settlement agreement reached in an earlier state court breach of contract case.

The plaintiff sued the attorney who represented the plaintiff’s adversary in the prior state court case (plaintiff in the Federal case was the defendant in the state case), for fraud in the inducement and legal malpractice.  While the defendant didn’t represent the plaintiff in the earlier state court suit, the plaintiff still sued the defendant for legal malpractice based on his hands-on involvement in crafting a settlement agreement in the state court lawsuit.

But the plaintiff breached the settlement agreement and after the defendant moved to enforce it, a million dollar judgment entered against the plaintiff in the state court action.

The plaintiff then sued in Federal court (there was diversity jurisdiction) on the theory that he was fraudulently induced to sign the settlement agreement that resolved the state court case.  The Northern District dismissed the plaintiff’s fraud in the inducement claim and provided a useful synopsis of the parameters of claim preclusion under Illinois law.

– Res judicata or “claim preclusion” prevents the relitigation of claims or defenses that were or could have been brought in a prior case;

– The doctrine seeks to encourage finality in litigation that sometimes seems to drag on interminably.  

– The three requirements for res judicata are (1) a final judgment on the merits; (2) an identity of cause of action (between the first and second suits); and (3) an identity of parties or their privies;

– For element (2) – the identity of cause of action requirement – Illinois applies the “transactional test”, which looks at whether the first and second cases stem from a “single group of operative facts”;

– Drilling down further, this single group of operative facts test looks at whether the facts underlying the first and second cases are related in time, space, origin or motivation, whether it’s convenient to try the cases together, and whether trying the cases as a single unit is congruent with the parties’ expectations and established business practices;

– The person against whom res judicata is invoked must have had a “full and fair” chance to litigate the claim in the earlier case.

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The Northern District found all res judicata elements were met.  There was a final money judgment on the merits in the state court suit.  Additionally, there was an identity of parties between the two cases since the attorney defendant in the Federal case represented the plaintiff in the state court case and so was clearly in privity with plaintiff (the defendant attorney’s interests were clearly aligned with the state court plaintiff’s).

The closest call was the identity of cause of action prong.  The court found that since the plaintiff in the Federal case sought the same relief – invalidation of the settlement agreement – as he could have in the earlier state court case, there was sufficient congruity between the respective claims in the state and Federal suits.  According to the court, the plaintiff clearly could have asserted fraud in the inducement as grounds for invalidating the state court settlement but failed to.

Take-aways:

This case serves as a good reminder to assert all possible claims in litigation.  Otherwise, you run the risk of having your claim or defense barred in a later case.

The case also provides a good illustration of how vague and malleable the transactional test (for determining whether there is res judicata identity of cause of action between two cases) is.  A court will look to the nature of a claim, not its title, when determining when two differently named causes of action (e.g. negligence, breach of contract) are considered to derive from the same underlying facts and therefore meet the same cause of action test.

 

An Enigma Wrapped Inside A Conundrum: Suing the LLC in Federal Court – How Hard Can it Be?

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A limited liability company (LLC) is generally lauded as a flexible business entity that provides the limited liability of a corporation with the tax attributes of a partnership (flow-through, not double, taxation).

Flexibility is another oft-cited hallmark of the LLC form as its members can be one or more individuals, corporations, partnerships or even other LLCs. It’s common to see LLCs that have several other LLC members that are in turn comprised of (still more) LLC members.  With multiple layers of LLC members, tricky jurisdictional issues routinely abound.

When Federal subject matter jurisdiction is at stake, the question of whether a plaintiff can sue an LLC in Federal court quickly morphs from an academic, “fun” one, to an important strategic one.

Here are some useful bullet-points:

– A Federal district court has original subject matter jurisdiction over matters involving citizens of different states and the amount in controversy exceeds $75,000. 28 U.S.C. s. 1332(a)(1).

– There must be “complete diversity” between the parties: each plaintiff must be a citizen of a different state than each defendant.  The easily parroted rule becomes hard to apply the more parties are involved in a given lawsuit; especially where business entities are implicated in a case.

– A corporation is considered a citizen of the state where it has its principal place of business and where it is incorporated.  So, if Corporation X was incorporated in Texas but has its main office in Ohio, Corporation X would be considered a citizen of both Ohio and Texas.  28 U.S.C. s. 1332(c)(1).

– An LLC is considered a citizen of the state of its members;

– An LLC can have as members, partnerships, corporations and other entities;

– When an LLC has multiple members that have varied citizenships, a court must examine each member’s state of citizenship, as well as each member’s members’ citizenship, when determining whether it has jurisdiction over an LLC defendant.

A Case Illustration

Cumulus Radio Corp. v. Olson, 2015 WL 1110592, a case I’ve twice featured for its discussion of Federal TRO guidelines, illustrates the serpentine analytical framework involved with an LLC that’s made up of one or more LLC members.

There, the plaintiff broadcasting company was a Nevada corporation with its principal place of business in Georgia.  The defendant LLC was a Delaware-registered LLC based in Oregon.  The defendant LLC had but one member that happened to be another LLC.  That LLC (the sole member of the defendant LLC) had a single member – an individual who lived in Georgia.

Because the Delaware LLC’s sole member’s sole member was a Georgia resident, there was incomplete diversity between the plaintiff and defendant.  Normally, this would give the defendant a basis to move to dismiss the complaint for lack of subject matter jurisdiction.  The plaintiff would then have to sue the LLC defendant in state court in Delaware (where it was formed) Oregon (where it is based) or Georgia (where its member’s member lived).

While the court ultimately found that the Georgia resident wasn’t truly a member based on the LLC’s Operating Agreement, Cumulus provides a good illustration of the multi-layered jurisdictional analysis required with an LLC defendant that has several individual or business entity constituents.

Sources:

– Hicklin Engineering LC v. Bartell, 439 F.3d 346 (7th Cir. 2006);

– 28 U.S.C. s. 1332(a), (c).

– http://www.insidecounsel.com/2013/09/12/litigation-carefully-examine-the-layers-of-llc-cit (this is a good article from 2013 that lays out the applicable rules)

Computer Fraud Suit Based On Real estate Records Fails – Illinois Northern District

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The Northern District of Illinois (Fidlar Technologies v. LPS Real Estate Data Solutions, 2015 WL 1059007 (N.D.Ill. 2015) granted summary judgment for a defendant real estate analytics firm in a computer fraud case filed by a software firm who makes paper real estate records available on-line for various county recorders offices across the country.

The plaintiff developed a program called “Laredo” that computerized real estate records and made them available to viewers for a fee.  The plaintiff sued when it found out that the defendant was using a web harvester to bypass plaintiff’s software controls and capture the electronic records.  The defendant’s harvester allowed it to disguise the amount of time it was spending on-line and so avoid paying print fees associated with the electronic data. 

The Computer Fraud And Abuse Act Claim

On its Computer Fraud and Abuse Act, 18 U.S.C. s. 1030 (“CFAA”) claim, the Court found there was a lack of evidence of defendant’s intent to defraud based on defendant evading the printing fees.  The CFAA defines an intent to defraud as acting “willfully and with specific intent to deceive or cheat, usually for the purpose of getting financial gain for one’s self or causing financial loss to another.”

The court noted that defendant offered sworn testimony that printing real estate records was a minor part of its business and that it did pay the various counties the maximum monthly access fee for the real estate data.  The defendant also produced evidence that it used its “client” program (which could avoid the time tracking and printing charges) not only in fee-charging counties, but also in those that didn’t charge at all.  This bolstered its argument that the harvester’s fee-avoidance was an unintended consequence of the defendant’s program.

Siding with the defendant, the court applied the CFAA restrictively.  It found that the Act’s aim is to punish those who access computers with the intention of deleting, destroying, or disabling information they find.

Attempting to avoid paying for minutes and printing fees – the “damage” alleged to have been done by the defendant here – wasn’t the type of damage contemplated by the CFAA.  The mere copying of electronic information from a computer system isn’t enough to satisfy the CFAA’s damage requirement.  18 U.S.C. § 1030(e)(8).

Trespass to Chattels

The plaintiff’s trespass to chattels claim was also rejected.  Trespass to chattel is an archaic legal doctrine aimed at protecting the integrity of someone’s personal property.  To successfully claim trespass to chattels, a plaintiff i must show “direct physical interference.”

The plaintiff’s claim that the defendant’s web harvester commands “physically touched” plaintiff’s computers and “substantially interfered” with plaintiff’s computer network wasn’t supported by the evidence.

The court noted that any interference was plaintiff’s claimed loss of subscription revenue and loss of goodwill.  These losses didn’t equal a physical threat to the proper functioning of plaintiff’s servers.

Afterwords:

Fidlar represents a court narrowly applying the CFAA so that it doesn’t cover the type of economic loss (e.g. subscription fees, etc.) claimed here by the plaintiff.  The case also amply illustrates that a successful CFAA claimant must show that its computer equipment or system was physically damaged or its data destroyed.  Otherwise, the proper remedy lies in a breach of contract or trade secrets violation.