Tag: 2-615 motions

Illinois Agency, Ratification and Alter-Ego Basics: Case Snapshot

image

Photo credit: passionateproject.blogspot.com

Several recurring commercial litigation issues are examined in Saletech, LLC v. East Balt, Inc., 2014 IL App (1st) 132639, a case that chronicles a dispute over a written distribution agreement for the sale of bakery products.

The plaintiff entered into the agreement with a Ukranian subsidiary  of various U.S. companies.  The plaintiff sued these U.S. defendants, claiming they were bound by the foreign subsidiary’s breach, that they were alter egos of the subsidiary, or at least ratified the subsidiaries’ conduct.  The trial court granted the U.S. companies’ motion to dismiss for failure to state a cause of action on all counts and the plaintiff appealed.

Held: Affirmed.

Rules/Reasons: Finding for the defendants, the court applied black-letter agency law, ratification and corporate liability rules.

Agency Law and Ratification

– agency is a fiduciary relationship where a principal has the right to control the agent’s conduct and the agent has the power to act on the principal’s behalf;

– an agent’s authority can be actual or apparent.   Actual authority can be (a) express or (b) implied and means that the principal has explicitly granted the agent authority to perform a certain act;

– apparent authority arises where (a) the principal holds the agent out as having authority to act on the principal’s behalf and (b) a reasonably prudent person would assume the agent has authority to act in light of the principal’s conduct;

– to show apparent agency, the plaintiff must prove (1) a principal’s consent or knowing acquiescence in the agent’s exercise of authority; (2) the third party’s good-faith belief that the agent possessed such authority; and (3) the third party’s detrimental reliance on the agent’s authority;

– apparent agency must be based on conduct of the principal; not the agent;

– ratification applies where a principal manifests an intent to be bound by an agent’s unauthorized act, after the fact;

– ratification can be shown mainly by a principal retaining the benefits of the unauthorized act.

¶¶ 14-15, 21

Here, the Court found the plaintiff failed to establish that the foreign subsidiary (who signed the contract) was the agent for the solvent U.S. defendants.  The plaintiff made only naked allegations of a principal-agent relationship between the domestic and foreign entities.

Without allegations that the defendants knew of the subsidiaries’ distributor agreement or that they held out the foreign firm as having actual or apparent authority to bind the defendants, the plaintiff’s agency allegations were too conclusory to survive a motion to dismiss under Illinois fact-pleading rules.

The plaintiff also failed to plead facts to show the defendants ratified any unauthorized conduct of the foreign company.  For example, plaintiff didn’t allege that the defendants accepted benefits from the distributorship contract after plaintiff alerted defendants to the foreign firm’s misconduct.

Alter-Ego

The plaintiff’s alter-ego allegations were also lacking. The plaintiff claimed that the signing foreign company was an alter-ego of the U.S. companies.

The alter ego doctrine affixes liability to a dominant person (or company) that uses a sham entity as a front or “conduit” in order to avoid contractual liability.  An alter ego plaintiff must make a “substantial showing” that one corporation is a dummy or “front” for another.

In breach of contract cases, the required showing for alter ego (piercing) liability is even more stringent than in tort cases.  This is because a party to a contract presumably entered into the contract with another company voluntarily and is presumed to suffer the consequences if the counterpart breaches and has no collectable assets. ¶ 25

The court found that here, the plaintiff failed to plead sufficient facts to demonstrate a unity of interest between the foreign company and the U.S.-based defendants that would permit the court to impute liability to the U.S. defendants.

Additionally, the plaintiff’s bare allegation that the defendants were “commingling funds” in order to defraud creditors lacked factual support and wasn’t enough to state a breach of contract claim predicated on an alter ego theory. ¶¶ 17-18, 22, 29.

Afterwords:

(1) Illinois fact-pleading rules require more than bare parroting elements of a cause of action to survive a motion to dismiss;

(2) Ratification only applies where plaintiff can plead facts showing a principal retained benefits of an improper agent transaction;

(3) Piercing the corporate veil based on alter ego allegations is difficult to prove; especially in breach of contract setting.

 

Illinois Motion Standards – A Case Note

Reynolds v. Jimmy John’s Enterprises, LLC, 2013 IL App (4th) 120139 reads like a mini-compendium of Illinois pleadings rules for its detailed discussion of Code Section 2-615, 2-619, and 2-1005 motion practice.  

Facts: The plaintiff motorcyclist sustained serious injuries when he was hit by a Jimmy John’s delivery driver in Springfield, Illinois.  The plaintiff brought negligence claims against the Jimmy John’s franchisor (Jimmy Johns, LLC) and the franchisee (JThree) alleging negligent training and negligent supervision claims. 

Plaintiff’s claimed the sandwich shop’s ubiquitous  “freaky fast” delivery slogan encouraged reckless driving that placed a premium on delivery speed over traffic safety.  Defendants filed separate section 2-615 and 2-619(a)(9) motions asserting that defendants weren’t responsible for the driver’s actions.

The trial court granted the defendants’ motions and plaintiff appealed.

Result: Reversed in part: the dismissal of plaintiff’s negligence claims against the franchisor and franchisee is reversed. 

Reasons: Defendants’ motions to dismiss are procedurally and substantively improper under Illinois pleading rules.  

Section 2-619.1 Motions (“Combined Motions”)

– A Section 2-619.1 motion must be in parts, must specify which section the motion is made under and clearly show the points or grounds relied upon under each section;

– Section 2-619.1 does not permit a movant to submit evidentiary material that contests the truth of the plaintiff’s allegations – both section 2-615 and 2-619 motions concede the truth of well-pled facts

(¶¶ 20-22)

Section 2-615(a) Motions (Complaint fails to state a cause of action)

– Section 2-615(a) motions are based on defects apparent on the face of a complaint;

– The movant is saying “so what? the facts plaintiff alleges don’t state a cause of action against me”;

– The court only considers (1) facts on the face of the pleadings; (2) matters subject to judicial notice; and (3) judicial admissions in the record;

– A movant’s use of deposition testimony to support a section 2-615 motion is improper;

– Section 2-615(a) is the proper vehicle for a motion to strike and should be used only where the allegation attacked is irrelevant and prejudicial to the movant.

(¶¶ 25, 26, 41)

Section 2-619(a)(9) Motions – Content and ‘Affirmative Matter’

– Purpose: to provide litigants with a way to dispose of issues of law and easily proved issues of fact – relating to affirmative matter – early in the litigation;

– The 2-619(a) motioning party is basically saying “yes, the complaint is legally sufficient but an affirmative matter exists that defeats the claim”;

– “affirmative matter” = a defense that is not a negation of the essential allegations of the plaintiff’s claim but that defeats the cause of action completely (examples: tort immunity, lack of standing);

– affirmative matter must be apparent on the face of the complaint.  If it’s not, the defendant should support his motion with affidavits or other evidence;

– “affirmative matter” does not include evidence the defendant expects to contest an ultimate fact stated in the complaint.  Example: if the plaintiff’s complaint says “the light was green” and defendant files a motion with a supporting affidavit or deposition that says “the light was red!”, this is not a proper 2-619 basis.  It is however a proper summary judgment (2-1005) basis though since it contests plaintiff’s version of facts;

– “affirmative matter” is not the defendant’s version of events since this merely negates the essential factual allegations of the complaint;

– Section 2-619(a)(9) does not permit a defendant to submit affidavits or evidentiary material for the purpose of contesting plaintiff’s facts (“plaintiff is wrong”) and presenting defendant’s version of the facts (“I am right”);

– the 2-619 movant has the burden of producing evidence in support of the affirmative matter which defeats plaintiff’s claim;

– Section 2-619(a)(9) should not be used to contest plaintiff’s factual allegations (see above);

A summary judgment motion under 2-1005 is the proper motion to file if you want to dispute plaintiff’s version of facts (Ex: plaintiff alleges his last day of work was 12.31.12.  Defendant disputes this.  In a summary judgment motion, defendant could attach an affidavit or other document that asserts/shows that plaintiff’s last day was 11.30.12 (or some other date));

( ¶¶ 33-34, 37)

Section 2-1005 Motions (summary judgment motions)

– a section 2-1005 assumes that a cause of action has been stated but challenges the plaintiff’s facts;

– A section 2-1005 summary judgment motion goes beyond the pleadings to determined if the case presents an issue of fact;

– A summary judgment motion is similar to a 2-619(a)(9) motion: both motions use affidavits and other evidentiary materials; BUT

– a section 2-619(a)(9) motion is not a substitute for a summary judgment motion;

– a section 2-1005 summary motion should be used where (a) defendant uses material to support its version of the facts; (b) defendant points out factual deficiencies in plaintiff’s case; or (c) where defendant is asserting that plaintiff can’t prove his case;

– if defendant mislabels a summary judgment motion by calling it a 2-619 motion, the court may treat the motion as a section 2-1005 summary judgment motion.

¶¶ 51-54.

Application: Since the defendants alternately used deposition testimony (plaintiff was deposed before plaintiff filed his amended complaint) and a supporting affidavit to contest the veracity of plaintiff’s allegations, they didn’t offer proper affirmative matter on their Section 2-619 motions. (¶¶ 37-42)

Take-aways: 

Jimmy John’s provides a thorough and nuanced discussion of the common pleadings motions utilized in Illinois and describes the key features and differences between them.