Illinois LLC Manager Liability For LLC Contract Obligations – Some Basics

This unpublished case is dated (2011) but still post-worthy for its discussion of the nature of limited liability company (LLC) contract obligations and when someone is privileged to intentionally tamper with an existing contract.

In 6030 Sheridan Road, LLC v. Wright Management, LLC, 2011 IL App. (1st) 093282-U, the plaintiff real estate developer sued defendants – an LLC property owner and its principal – for tortious interference with business relationship after a planned condominium conversion tanked.

The plaintiff sued when the defendants terminated the condo conversion agreement because of their displeasure with the plaintiff’s handpicked real estate broker and marketing firm.

The plaintiff sued claiming the defendants tortiously interfered with plaintiff’s contracts with the broker and marketing firm and caused the plaintiff to breach those contracts.  The trial court granted summary judgment for the defendants.

Held: Affirmed.

Reasons: the court first held that an individual LLC member could conceivably interfere with a contract entered into by that LLC.  The elemental LLC rules relied on by the court:

– An LLC is a separate entity from its principal members and can sue and be sued and make contracts in its own capacity.

– An LLC is a hybrid form of doing business that combines the advantages of a corporation’s limitation on personal liability with a partnership’s pass-through tax treatment (i.e., the LLC pays no entity level state or federal income tax.)

– The Limited Liability Company Act (the Act) (805 ILCS 180/1-1 et seq.) requires an LLC to have one or more members and is a separate legal entity from its members.

– An LLC can be member-managed or manager-managed and LLC members owe an LLC’s other members a fiduciary duty of loyalty and care. The same holds true for managers of manager-managed companies.

– The debts of an LLC, whether arising in contract, tort, or otherwise, are solely the debt of the LLC; not its managers or members;

– A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager.

– An LLC member can only be responsible for LLC debts where: (1) the articles of organization provide for individual liability; and (2) the member has consented in writing.

See 805 ILCS 180/10-10; 180/1-30; 180/15-1, 15-3.

Afterwords:

This case provides detailed discussion of the LLC business entity and the scope of an LLC member’s liability for contract obligations.

 

Fraud, Partnership Formation and Confidentiality Agreements in Illinois: A Case Illustration

The Northern District examines several recurring commercial litigation and employment law issues in nClosures Inc. v. Block and Company, Inc., 2013 WL 6498528. Chief among them are the facts giving rise to common law fraud liability, the fundamentals of a partnership relationship and the fiduciary duties that business partners owe one another.

Plaintiff designs and sells tablet computer accessories. In 2011, plaintiff and defendant entered a partnership agreement and a related Non–Disclosure Covenant (NDA) for the sale of the tablet items. The business relationship later imploded and plaintiff sued for damages.

Granting summary judgment for the defendant, the court examined the quantum of evidence needed to sustain fraud, breach of fiduciary duty and breach of partnership claims under Illinois law.

To establish common law fraud, a plaintiff must prove that: (1) defendant made a false statement; (2) of material fact; (3) which defendant knew or believed to be false; (4) with the intent to induce plaintiff to act; (5) the plaintiff justifiably relied on the statement; and (6) the plaintiff suffered damage from such reliance. But mere expressions of opinion or statements that relate to future or contingent events are not actionable.

Rejecting the plaintiff’s fraud claim, the court found that the plaintiff failed to establish reliance – that it took some action or refrained from action based on a false statement. The defendant’s alleged fraudulent statement – that a partnership existed – was made several months after plaintiff supplied tablet accessories. As a result, it was chronologically impossible for the plaintiff to have relied on the statement.

Next, the court found for the defendant on the plaintiff’s breach of fiduciary duty claim. To prevail on this claim, a plaintiff must show: (1) the existence of a fiduciary duty (basically, a relationship of business trust and loyalty); (2) a fiduciary duty was breached, and (3) that the breach damaged the plaintiff.

A partnership is a quintessential fiduciary relationship in Illinois. To establish a partnership under Illinois law, the plaintiff must show that two or more parties (1) joined together to carry on a trade or venture, (2) for their common benefit, (3) with each contributing property or services to the enterprise, and (4) sharing in the profits.

Here, the court rejected plaintiff’s fiduciary duty claim because there was no partnership between the parties as a matter of law. Since there was no joint sharing of profits and losses, there could be no partnership.

The plaintiff also lost its breach of contract claim based on the defendant’s alleged breach of the confidentiality agreement. In Illinois, a confidentiality agreement will be enforced only “when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.” How much effort is reasonable to keep information confidential is decided on case-by-case basis.

The record was devoid of any efforts the plaintiff made to safeguard its product design drawings. In fact, just the opposite was true: plaintiff freely provided copious design and product data to the defendant for sale to its ( defendant’s) customers. Since plaintiff didn’t expend any physical or fiscal resources to shield its data from disclosure, it couldn’t enforce the confidentiality agreement.

Afterwords:

A central partnership component is the sharing of profits. Without it, there can be no partnership or breach of fiduciary duty;

Fraud claims requires reliance on the false statement before the statement. If the false statement occurs after plaintiff takes action/non-action, the plaintiff will be unable to show he relied on the statement;

Valid nondisclosure agreement requires proof that the subject information is truly confidential and treated as such by the plaintiff.

‘Closely Intertwined’ Business Relationship Equals Possible Joint Venture – Says Illinois Court

Consider this: a multi-national plastics seller (“Seller”) has a written contract with a plastics manufacturer (the “Manufacturer”) that labels the Manufacturer as an independent contractor of the Seller.  Under the agreement, the Seller supplies material to the Manufacturer who then makes plastic products exclusively for the Seller and sells the products back to the Seller.  The Seller buys the finished products from the Manufacturer at a pre-set price and then sells them to its (Seller’s) own customers.  The Seller and Manufacturer do not share any profits on Seller’s product sales.

An employee of the Manufacturer then gets injured on the job and sues both the Seller and Manufacturer for damages claiming they are joint venturers and therefore equally responsible for his injuries.  This is a significant event given the size and financial resources of the Seller.

Question: does this claim possibly have legs?

Answer: “Maybe.”  The First District held that the question of whether there is a joint venture between Seller and Manufacturer was open enough to survive summary judgment.

The plaintiff in Hyatt v. Western Plastics, 2014 IL App (2d) 140178, suffered severe injuries when his arms got caught in an extruding machine. He sued his employer – the “Manufacturer” in the above snippet – along with the Seller on the theory that there was a joint venture between the Manufacturer and Seller.  The trial court entered summary judgment for the Seller.  The plaintiff appealed.

Reversing the trial court, the First District engaged in a detailed analysis of some Illinois business structure basics:

– A joint venture is an association of two or more persons to carry on a single enterprise for profit;

– Joint venture members  owe fiduciary duties to one another and are vicariously liable for negligent acts of the other joint venturers carried out in the course of the enterprise;

– No formal agreement is necessary to form a joint venture and it can be inferred from the parties’ conduct and surrounding circumstances;

– Joint venture is a creature of contract law; not a statute and depends on the parties’ intent;

– Cardinal joint venture traits include (1) a community of interest – manifested by the joint contribution of money, property, effort, skill or knowledge; (2) an express or implied agreement to carry on an enterprise; (3) a sharing of profits; and (4) joint control and management of the enterprise;

(¶¶ 72-77)

Synthesizing the case’s thick discovery record, the court found there was a disputed question of fact on whether the parties formed a joint venture.

Some of the evidence pieces that was key to the court’s summary judgment reversal included:

(1) The Manufacturer-Seller contract was nearly thirty years’ old (automatically renewing every year) and required the Manufacturer to make some 800,000 pounds of plastic products annually and to sell them exclusively to the Seller at a pre-set formula.;

(2) Exclusivity: the contract prevented the Manufacturer from selling the plastic product to anyone other than Seller and gave Seller the final say over any product or process changes;

(3) A “Cost Improvement” section of the contract provided that Seller and Manufacturer would share the benefits of cost improvements on a 50/50 basis;

(4) Multiple emails revealed that Seller’s and Manufacturer’s personnel discussed a mutually beneficial business relationship and alluded to long-term collaboration and cost savings sharing.

(¶¶ 80-101)

In the end, the Court really didn’t know what to make of the parties’ plastics making arrangement.  The most it could say was that it was  a “long-term, closely intertwined relationship.” (¶ 101).

Taken together, the evidence of the parties’ unique business model raised a material fact question (as to whether it was a joint venture) that should have survived summary judgment.

Afterwords:

Definitely a pro-plaintiff case in the sense that a company that’s arguably twice removed from an injured plaintiff and who sells to a universe of consumers unrelated to those the plaintiff’s employer sells to can still be deemed a joint venturer of that employer.

The case could have huge liability ramifications.  If a deep-pocketed seller can be viewed as being in a joint venture with a separate manufacturer, that seller is potentially on the hook for a high dollar jury verdict or settlement for actions of the manufacturer alone.

The case lesson for business defendants is clear: If the intent is to be considered separate and independent, they should document that and take pains not to jointly control business property or share in its profits.