Tag: commercial litigation

Doctor’s Oral Promise to Retire in Future Not Enough To Sustain Healthcare Plaintiff’s Fraud Claims

In Heartland Women’s Healthcare, Ltd. v. Simonton-Smith, 2021 IL App (5th) 200135-U, the appeals court affirmed summary judgment for an obstetrician sued for fraud based on her alleged verbal promise to retire from her practice at the end of a three-year employment term.

The plaintiff claimed the defendant tricked it into buying her practice by promising to retire. The written agreement resulting from the parties’ negotiations contained neither a non-compete term nor a recital that defendant intended to retire at the agreement’s conclusion.

The trial court granted summary judgment for the defendant on plaintiff’s fraud and negligent misrepresentation claims.  Plaintiff appealed.

Affirming, the Fifth District found that the plaintiff failed to produce evidence to support its misrepresentation claims and specifically, to show defendant hatched a “scheme to defraud” the plaintiff.

In Illinois, to state a colorable fraudulent misrepresentation claim, a plaintiff must allege: (1) a false statement of material facts, (2) known or believed to be false by the person making it, (3) an intent to induce a plaintiff to act, (4) action by the plaintiff in justifiable reliance on the truth of the statement, and (5) damage to the plaintiff resulting from the reliance.

A negligent misrepresentation plaintiff must also establish these elements but instead of showing a knowingly false statement, must prove the defendant (i) was careless or negligent in ascertaining the truth of the statement and (ii) owed a duty to the plaintiff to impart accurate information.

In both a fraudulent and negligent misrepresentation claim, the statement must be of an existing or past fact and not merely a promise to do something in the future.  The alleged fraud must also be complete at the time of the challenged statement as opposed to an intention to commit a future fraud.

The ‘Scheme to Defraud’ Exception

Where the false representation of future conduct is the scheme or device employed to accomplish the fraud, a court can restore the parties to the positions they occupied before the fraud was committed.  And while courts make clear that something beyond a lone broken promise is usually required to trigger the scheme exception, that “plus-factor” is still elusive.

Some courts require a plaintiff to allege a sustained pattern of repeated false representations [see HPI Health Care Services, Inc. v. Mt. Vernon Hospital, Inc., 131 Ill.2d 145 (1989)] while others [Roda v. Berko (401 Ill.335 (1948), Vance Pearson, Inc. v. Alexander, 86 Ill.App.3d 1105 (1980)] have held that a single promise can trigger the scheme exception.

In cases that have recognized the exception in the single broken promise setting, the plaintiff must generally produce evidence of a  defendant’s contemporaneous intention not to follow through on the promise.   The cases also make clear that whether a plaintiff is proceeding on a course of conduct scheme theory or one that involves only one promise, it must show the defendant’s fraudulent intent existed at or before the time of the promise. [25]

Here, the plaintiff could not prove the defendant promised to retire while, at the same time, never intending to fulfill that promise at the outset.  For support, the Court quoted both plaintiff’s agent’s and defendant’s deposition testimony.  Both testified that while the defendant’s future retirement was discussed prior to inking the three-year pact, it was never reduced to writing.  The plaintiff also could not pinpoint a definite promise by the defendant to retire when the employment contract lapsed.

As further proof that the defendant never unequivocally promised to retire, the plaintiff’s agent testified he even asked the defendant not to retire and that defendant stay beyondthe employment contract’s end date.  In the end, Plaintiff’s evidence did not go far enough to establish either an oral promise to retire at the agreement’s conclusion or the defendant’s intention not to fulfill that promise.

Afterwords:

In finding for the doctor defendant, the Heartland Women’s Healthcare Court was careful to respect the boundary between contract and tort law damages – a delineation that, in theory at least, prevents every broken promise from undergirding a fraud claim.

And while the content and outer reaches of the scheme to defraud exception [to the rule that a false promise is not actionable fraud] is still murky, it seems that something beyond a one-off broken promise is generally required.  A plaintiff invoking the scheme exception has a better chance of surviving a pleadings motion or summary judgment where it can show a defendant’s pattern of repeated broken promises.

Here, the plaintiff alleged only a single misstatement – defendant’s supposed oral promise to retire at the conclusion of the employment contract.  Without evidence of defendant’s contemporaneous intent not to uphold her promise, there wasn’t enough evidence of a scheme to defraud to survive summary judgment.

In hindsight, the Plaintiff should have negotiated and codified both a non-compete provision and defendant’s imminent retirement as material terms of the contract.

 

 

15-Year ‘Course of Dealing’ Clarifies Oral Agreement for Tax Sale Notices – IL First Dist.

The would-be tax deed buyer in Wheeler Financial, Inc. v. Law Publishing Co., 2018 IL App (1st) 171495 claimed the publisher defendant’s erroneous sale date in a required tax sale notice thwarted its purchase of a pricey Chicago property.

A jury found for the publisher defendant on the buyer’s breach of oral contract claim since the plaintiff failed to properly vet the draft “Take Notice” (the statutory notice provided by a tax deed applicant that gives notice to the owner) supplied by the defendant before publication. The plaintiff appealed.

Affirming the jury verdict, the First District discusses the nature of express versus implied contracts, the use of non-pattern jury instructions and when course of dealing evidence is admissible to explain the terms of an oral agreement.

Course of dealing – Generally

There was no formal written contract between the parties. But there was a 15-year business relationship where the plaintiff would send draft tax deed petition notices to the defendant who would in turn, publish the notices as required by the Illinois tax code. This decade-and-a-half course of dealing was the basis for jury verdict for the publisher defendant.

Section 223 of the Restatement (Second) of Contracts defines a course of dealing as a sequence of previous conduct between parties to an agreement “which is fairly regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.”

A course of dealing “gives meaning to or supplements or qualifies their agreement” and can be considered when determining the terms of an oral contract. Where contract terms are uncertain or doubtful and the parties have – by their conduct – placed a construction on the agreement that is reasonable, such a construction will be adopted by the court. [¶ ¶ 77-78]

Course of Dealing – The Evidence

Here, the course of dealing proof was found in both trial testimony and documents admitted in evidence.

At trial, current and former employees of the publisher defendant and plaintiff’s agent all testified it was the parties’ common practice for defendant to first provide draft Take Notices to plaintiff for its review and approval prior to publication. E-mails introduced in evidence at trial corroborated this practice.

In addition, plaintiff’s affiliated tax lien company’s own handbook contained a published policy of plaintiff reviewing all Take Notices for accuracy before the notices were published. [¶¶ 35, 83-85]

The appeals court agreed with the jury that the defendant sufficiently proved the parties course of dealing was that defendant would give plaintiff a chance to review the Take Notices before publication. And since the plaintiff failed to adhere to its contractual obligation to review and apprise the defendant of any notice errors, plaintiff could not win on its breach of contract claim. (This is because a breach of contract plaintiff’s prior material breach precludes it from recovering on a breach of contract claim.)

Jury Instructions and A Tacit Exculpatory Clause?

Since no Illinois pattern jury instruction defines “course of dealing,” the trial court instructed the jury based on Wald v. Chicago Shippers Ass’n’s (175 Ill.App.3d 607 (1988) statement that a prior course of dealing can define or qualify an uncertain oral agreement. [¶ 96] Since Wald accurately stated Illinois law on the essence and reach of course of dealing evidence, it was proper for the jury to consider the non-pattern jury instruction.

The court then rejected plaintiff’s argument that allowing the legal publisher to avoid liability was tantamount to creating an implied exculpatory clause. The plaintiff claimed that if the publisher could avoid liability for its erroneous notice date, the parties’ agreement was illusory since it allowed the defendant to breach with impunity.

The court disagreed. It held that the parties’ course of dealing created mutual obligations on the parties: plaintiff was obligated to review defendant’s Take Notices and advise of any errors while defendant was required to republish any corrected notices for free. These reciprocal duties placed enforceable obligations on the parties.

Afterwords:

Where specifics of an oral agreement are lacking, but the parties’ actions over time plainly recognize and validate a business relationship, a court will consider course of dealing evidence to give content to the arrangement.
Where course of dealing evidence establishes that a breach of contract plaintiff has assumed certain obligations, the plaintiff’s failure to perform those requirements will doom its breach of contract claim.

 

 

7th Cir. Addresses Guarantor Liability, Ratification Doctrine in Futures Trading Snafu

Straits Financial v. Ten Sleep Cattle, 2018 WL 328767 (N.D.Ill. 2018) examines some signature business litigation issues against the backdrop of a commodities futures and trading account dispute. Among them are the nature and scope of a guarantor’s liability, the ratification doctrine as applied to covert conduct and the reach of the Illinois consumer fraud statute.

The plaintiff brokerage firm sued a Wyoming cattle rancher and his company to recover an approximate $170K deficit in the defendants’ trading account. (The defendants previously opened a non-discretionary account with plaintiff for the purpose of locking in future livestock prices.)

The ranch owner counter-sued, alleging a rogue trader of plaintiff made unauthorized trades with defendants’ money over a three-month period.  Defendants counter-sued for consumer fraud, breach of fiduciary duty and conversion. After a seven-day bench trial, the court entered a money judgment for the defendants and the plaintiff appealed.

In substantially affirming the trial court, the Seventh Circuit first tackled the plaintiff’s breach of guaranty claim.  In Illinois, guarantees are strictly construed and a guarantor’s liability cannot extend beyond that which he has agreed to accept.  A proverbial favorite of the law, a guarantor is given the benefit of any doubts concerning a contract’s enforceability.  A guarantor’s liability is discharged if there is a “material change” in the business dealings between the parties and an increase in risk undertaken by a guarantor.

Here, the speculative trading account (the one where the broker made multiple unauthorized trades) differed vastly in form and substance from the non-discretionary account.

Since the two trading accounts differed in purpose and practice, the Court held that it would materially alter the guarantor’s risk if he was penalized for the plaintiff’s broker’s fraudulent trading spree.  As a result, the Seventh Circuit affirmed the trial judge’s ruling for the defendant on the guarantee claim.

The Court then rejected plaintiff’s ratification argument: that defendants’ authorized the illegal churned trades by not timely objecting to them
An Illinois agency axiom posits that a person does not have an obligation to repudiate an illegal transaction until he has actual knowledge of all material facts involved in the transaction. Restatement (Third) of Agency, s. 4.06.

Illinois law also allows a fraud victim to seek relief as long as he renounces the fraud promptly after discovering it. A party attempting to undo a fraudulent transaction is excused from strict formalism, too.

Here, the ranch owner defendant immediately contacted the plaintiff’s broker when he learned of the improper trades and demanded the return of all money in the non-discretionary trading account. This, according to the Court, was a timely and sufficient attempt to soften the impact of the fraudulent trading.

The Court affirmed the trial court’s attorneys’ fees award to the defendants on its consumer fraud counterclaim. The Illinois Consumer Fraud Act, 815 ILCS 505/10a(c)(the “CFA”) allows a court to assess attorneys’ fees against the losing party.

The plaintiff argued that the trial judge errored by awarding attorneys’ fees expended by defendants in both CFA and non-CFA claims. Plaintiff contended  the trial judge should have limited his fee award strictly to the CFA claim.

Rejecting this argument, the Seventh Circuit noted that under Illinois law, where statutory fraud (which allow for fees) and common law (which don’t) claims arise from the same operative facts and involve the same evidence at trial, a court can award all fees; even ones involved in prosecuting or defending non-fee claims. And since facts tending to prove fraudulent trading “were woven throughout [the] case and the work done to develop those facts [could] not be neatly separated by claim,” the District court had discretion to allow defendants’ attorneys’ fees claim incurred in all of its counterclaims and defenses.

The Court then reversed the trial judge’s holding that the defendants failed to mitigate their damages by not reading plaintiff’s trading statements or asking about his accounts.  A breach of contract or tort plaintiff normally cannot stand idly by and allow an injury to fester without making reasonable efforts to avoid further loss.

But here, since the plaintiff’s broker committed fraud – an intentional tort – any “contributory negligence” resulting from defendant not reading the mailed statements wasn’t a valid defense to the rogue broker’s fraudulent conduct.

Afterwords:

This case shows the length a court will go to make sure a fraud perpetrator doesn’t benefit from his improper conduct.  Even if a fraud victim is arguably negligent in allowing the fraud to happen or in responding to it, the court will excuse the negligence in order to affix liability to the fraudster.

This case also illustrates how guarantors are favorites of the law and an increase in a guarantor’s risk or a marked change in business dealings between a creditor and a guarantor’s principal will absolve a guarantor from liability.

Finally, Ten Sleep shows that a prevailing party can get attorneys’ fees on mixed fee and non-fee claims where the same core of operative facts underlie them.