Tag: corporate officer

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.

 

 

Corporate Officer Can’t Tortiously Interfere with His Company’s Contract; No Punitives for Breach of Contract – ND IL

In Richmond v. Advanced Pain Consultants, P.C., 2015 WL 4971040 (N.D.Ill. 2015), the plaintiff sued the defendants – two companies that operated suburban (Chicago) pain clinics and their doctor principal – claiming several thousand dollars in unpaid computer and accounting services plaintiff performed at the clinics over a several-month period.  The plaintiff brought claims for overtime under the Federal Fair Labor Standards Act and joined companion state law claims for breach of contract, quantum meruit and tortious interference with contract.  The defendants moved to dismiss plaintiff’s claims arguing preemption and the failure to state a claim, among other things.

In dismissing some of plaintiff’s claims (and sustaining others), the Northern District stressed some vital pleading rules and substantive law principles that apply in Federal court litigation.

Federal Notice Pleading Requirements

Federal Rule 8(a)(2) requires a “short and plain statement of the claim showing a pleader is entitled to relief.”  The plaintiff must provide enough factual context to rise above a speculative level so that a defendant has “fair notice” of what the plaintiff’s claim is.  However, “threadbare recitals of the elements of a cause of action” are not enough to survive a Rule 12(b)(6) dismissal motion.

Preemption and Punitive Damages

The defendant first argued the plaintiff’s common law claims (breach of contract, quantum merit, tortious interference) were preempted by the FLSA.  FLSA preempts common law claims that seek to recover overtime or minimum wage compensation.  But if the plaintiff’s claim seeks something other than overtime or minimum wage payments, those claims aren’t preempted.  Here, several of the plaintiff’s claims were for “regular wages” (not overtime) and so were not preempted by FLSA.

The court next struck plaintiff’s punitive damages claim from his breach of contract suit.  Under Illinois law, contract law’s sole purpose is to compensate the nonbreaching party.  It does not seek to punish the breaching party or give an economic windfall to the plaintiff.  This is true even if the breach is intentional.  Punitive damages can only be allowed in the breach of contract setting where the breach is itself an actionable, independent tort (e.g. a civil conspiracy, fraud, etc.).  Since there was no independent tortious conduct over and above the breach of contract – failure to pay plaintiff for his office services – the court struck plaintiff’s punitive damages claims.

Tortious Interference Against A Single-Member Corporation

The court dismissed the plaintiff’s tortious interference claims against the individual defendant – the sole shareholder of the two corporate defendants.

To state a claim for tortious interference with contract, a plaintiff must allege: (i) the existence of a valid and enforceable contract between a plaintiff and another; (ii) defendant’s awareness of the contractual obligation; (iii) defendant’s intentional and unjustified inducement of a breach of contract; (iv) breach of the contract by the third party caused by the defendant’s wrongful conduct.

A colorable tortious interference claim requires the involvement of at least three entities: (1)-(2) the parties to the contract and (3) the person inducing the breach.

Here, the individual defendant was the sole officer and manager of the two defendant medical offices who had unchallenged authority to make all hiring and firing decisions for the two entities.  The court noted that the two corporate defendants wouldn’t exist without the individual defendant.  There were no other shareholders or parties who had an interest in the corporate defendants.  Since the individual defendant was the only operator and stakeholder in the corporate defendants, he could not tortuously induce a breach of (effectively) his own contract with the plaintiff.

Afterwords:

The case provides some useful damages law reminders including that in a breach of contract suit, punitive damages normally can’t be recovered.  The plaintiff must show that the defendant’s breach is itself an intentional tort for a punitive claim possibly to lie.

Advanced Pain Consultants also makes clear that an officer of a corporation cannot tortiously interfere with a contract involving that corporation where that officer is the only shareholder of the corporation and has sole responsibility for the corporation’s business.

 

Company’s Fraud Suit Versus Rival’s Ex-CFO Defeated by Prior Arbitration Award: Illinois Res Judicata Basics

The privity element of the res judicata doctrine focuses on whether two parties to two separate lawsuits have legal interests that are so intertwined they should be treated as the same parties.  Privity is usually an easier question than the res judicata’s other well-settled components – whether the two cases stem from the same transaction and whether that first case was resolved via a final judgment on the merits.

In Alaron Trading Co. v. Hehmeyer, 2015 IL App (1st) 133785-U, the First District examines res judicata’s privity element through the lens of a trading firm suing an officer of a rival company for stealing clients and not paying referral fees where that rival previously won an arbitration award against the trading firm for breach of contract.

Facts and Chronology: In 2012, the corporate officer defendant’s former company won a $400,000 arbitration award against the plaintiff trading firm for prematurely terminating a year-long trading contract.  Several months after the arbitration award, the trading firm sued the corporate officer in state court for fraud and tortuous interference. The trial court granted defendant’s Section 2-619 motion, premised on res judicata.

Held: Affirmed.

Rules/Reasons:

– A motion under Code Section 2-619(a)(4) is the proper section to bring a res judicata motion;

– Res judicata requires an “identity of cause of action” between two separate legal proceedings (here, an arbitration case followed by a later court case);

– Res judicata can bar a defendant in one case from filing claims in a second case where the second case claims are based on the same facts as the plaintiff’s first case allegations.

– Separate claims are considered the same for res judicata purposes where they arise from a single group of operative facts, even though the causes of action are titled differently;

– Res judicata not only bars claims that were brought in an earlier case/arbitration, but also claims that could have been brought;

– Res judicata also requires “privity” between parties to two separate proceedings.  Privity applies where two parties are different in name but whose legal interests are substantially aligned such that an adjudication of one party’s rights in an earlier case will bind the second party in the second case;

– Quintessential privity relationships include members of partnerships and corporation and their officers, directors and shareholders;

(¶¶46-49, 56).

Here, all res judicata grounds were present.  The defendant in the state court case was the ex-CEO of the prior arbitration plaintiff.  In addition, the state court plaintiff (the trading firm and arbitration defendant) filed a voluminous counterclaim in the arbitration that was based primarily on the (state court) defendant’s conduct and that stemmed from the same underlying facts as the state court complaint.

Given his former CEO status, the defendant’s interests neatly aligned with those of his former employer – the arbitration plaintiff.  And since the court found that the state court plaintiff could have filed counterclaims against the defendant CEO in the earlier arbitration, res judicata applied and defeated plaintiff’s current court action.

Afterwords:

The lesson of this case is to file all possible claims against all possible parties that stem from the same underlying facts.  This is especially urgent where it looks like there is a possibility of multiple proceedings: that is, where successive lawsuits (or arbitrations) could be filed.  Otherwise, by holding back on claims in a prior case, a litigant could be foreclosed from filing claims in a second suit.