Tag: evidence

Veil Piercing Claim Triable By Jury; Consumer Fraud Act Applies to Failed Gas Station Sale – IL 3rd Dist.

An Illinois appeals court recently affirmed a $700K money judgment for a gas station buyer in a fraud case against the seller.

The plaintiff gas station buyer in Benzakry v. Patel, 2017 IL App(3d) 160162 sued the seller when the station closed only a few months after the sale.

The plaintiff alleged he relied on the seller’s misrepresenting the financial health and trustworthiness of the station tenant which led the plaintiff to go forward with the station purchase.  Plaintiff sued for common law and statutory fraud and sought to pierce the corporate veil of the LLC seller.

Affirming judgment for the plaintiff, the Third District discusses, among other things, the piercing the corporate veil remedy, the required evidentiary foundation for business records, the reliance element of fraud and the scope of the consumer fraud statute.

Piercing the Corporate Veil: Triable By Bench or Jury?

The jury pierced the seller LLC’s corporate veil and imposed liability on the lone LLC member.

The Court addressed this issue of first impression on appeal: whether a piercing the corporate veil claim is one for the court or jury.  The Court noted a split in Federal authority on the point.  In FMC v. Murphree, 632 F.2d 413 (5th Cir. 1980), the 5th Circuit held that a jury could hear a piercing claim while the  7th Circuit reached the opposite result (only a court can try a piercing action) in IFSC v. Chromas Technologies, 356 F.3d 731 (7th Cir. 2004).

The Court declined to follow either case since they applied only Federal procedural law (they were diversity cases).  The Court instead looked to Illinois state substantive law for guidance.

Generally, there is no right to a jury trial in equitable claims and piercing the corporate veil is considered an equitable remedy.  However, Code Section 2-1111 vests a court with discretion to direct any issue(s) involved in an equitable proceeding to be tried by a jury.  The appeals court found that the trial court acted within its discretion in deciding that the piercing claim should be decided by a jury. (¶¶ 29-30)

Consumer fraud – Advertisement on Web = ‘Public Injury’

The Third District reversed the trial court’s directed verdict for the defendants on the plaintiff’s Consumer Fraud Act (CFA) count.  Consumer fraud predicated on deceptive practices requires the plaintiff to prove (1) a deceptive act or practice by a defendant, (2) defendant’s intent that the plaintiff rely on the deception, (3) the occurrence of the deception during a course of conduct involving trade or commerce, (4) actual damage to the plaintiff, and (5) damage proximately caused by the deception.

The trial court sided with the defendant on this count since the plaintiff didn’t prove that defendants conduct resulted in injury to the public generally.  CFA Section 10a (815 ILCS 505/10a) used to require a plaintiff to prove that a misrepresentation involved trade practice that addressed the market generally.  However, a 1990 amendment to the Act changed that.  The current version of the Act doesn’t require a plaintiff to show public injury except under limited circumstances.

Even so, the Court still held that the defendant’s misstating the gas station’s annual fuel and convenience store sales on a generally accessible website constituted a public injury under the CFA.

Going further, the Court construed the CFA broadly by pointing to the statutory inclusion of the works “trade” and “commerce.”  This evinced the legislative intent to expand the CFA’s scope.  Since defendant’s misrepresentations concerning the tenant were transmitted to the public via advertisements and to the plaintiff through e-mails, the Court viewed this as deceptive conduct involving trade or commerce under the CFA.  (¶¶ 81-82)

Computer-Generated Business Records: Document Retention vs. Creation

While it ultimately didn’t matter (the business records were cumulative evidence that didn’t impact the judgment amount), the Court found that bank statements offered into evidence did not meet the test for admissibility under Illinois evidence rules.

The proponent of computer-generated business records must show (1) the equipment that created a document is recognized as standard, and (2) the computer entries were made in the regular course of business at or reasonably near the happening of the event recorded.

Showing “mere retention” of a document isn’t enough: the offering party must produce evidence of a document’s creation to satisfy the business records admissibility standard.  Here, the plaintiff failed to offer foundational testimony concerning the creation of the seller’s bank statements and those statements shouldn’t have been admitted into evidence.

Take-aways:

1/ The Court has discretion to order that an equitable piercing the corporate veil claim be tried to a jury;

2/ Inadequate capitalization, non-functioning shareholders and commingling of funds are badges of fraud or injustice sufficient to support a piercing the corporate veil remedy;

3/ Computer-generated business records proponent must offer foundational testimony of a document’s creation to get the records in over a hearsay objection;

4/ False advertising data on a public website can constitute a deceptive practice under the consumer fraud statute.

 

 

Secretary of State’s LLC File Detail Report Is Public Record – IL Court (A Deep Cut)

R&J Construction v. Javaras, 2011 WL 10069461, an unpublished and dated opinion, still holds practical value for its discussion of the judicial notice rule, breach of contract pleading requirements and a limited liability company member’s insulation from liability for corporate debts.

The plaintiff sold about $70K worth of construction materials to a concrete company associated with the individual defendant.  The concrete company’s legal name was WS Concrete, LLC, an Illinois limited liability company doing business under the assumed name, West Suburban Concrete.  Defendant was a member of the LLC and point-person who ordered supplies from the plaintiff.

The plaintiff sued the individual and did not name the LLC as a party defendant.

The trial court dismissed the complaint because the plaintiff failed to attach the written contract and there was no evidence the defendant assumed personal responsibility for the contract obligations.  The plaintiff appealed.

Result: Affirmed.

Reasons:

The Court first found the trial court correctly dismissed plaintiff’s suit for failure to attach the operative contract.

Code Section 2-606 requires a plaintiff to attach a written instrument (like a contract) to its pleading where the pleading is based on that instrument.  The exception is where the pleader can’t locate the instrument in which case it must file an affidavit stating the instrument is inaccessible.

Here, the plaintiff alleged a written contract but only attached a summary of various purchase orders and invoices to the complaint.  Since it failed to attach the contract, the appeals court found the complaint deficient and falling short of Section 2-606’s attached-instrument requirement.

The court next addressed whether the LLC File Detail Report (see above image), culled from the Illinois Secretary of State “cyberdrive” site was admissible on Defendant’s motion to dismiss.  In ruling the Report was admissible, the Court cited to case precedent finding that Secretary of State records are public records subject to judicial notice.  (Judicial notice applies to facts that are readily verifiable and not subject to reasonable dispute.)

Since the LLC Report plainly demonstrated the proper defendant was the LLC (as opposed to its member), and there was no evidence the individual defendant took on personal liability for plaintiff’s invoices, the trial court correctly dismissed the defendant.

Added support for the defendant’s dismissal came via the Illinois Limited Liability Company Act, 805 ILCS 180/1 et seq.  Section 10-10 of the LLC Act provides that an LLC’s contractual obligations belong solely to the LLC and that a member cannot be personally responsible for LLC contracts unless (1) the articles of organization provide for personal liability and (2) the member consents in writing.

The Court next addressed plaintiff’s agent of a disclosed principal argument.  The plaintiff asserted that since the individual defendant is the person who ordered plaintiff’s construction materials and it was unclear who the defendant represented, the defendant was responsible for plaintiff’s unpaid invoices.

The court rejected this argument.  It noted that under Illinois law, where an agent signs a contract by signing his own name and providing his own personal contact information (address, phone number, SS #, etc.) and fails to note his corporate affiliation, he (the agent) can be personally liable on a contract.  In this case, however, there was no documentation showing defendant ordering supplies in his own name.  All invoices attached to the plaintiff’s response brief (to the motion to dismiss) reflected the LLC’s assumed name – “West Suburban Concrete” – as the purchasing entity.

Afterwords:

(1) the case provides a useful analysis of common evidentiary issues that crop up in commercial litigation where a corporate agent enters into an agreement and the corporation is later dissolved;

(2) Both the LLC Act and agency law can insulate an individual LLC member from personal liability for corporate debts;

(3) Secretary of State corporate filings are public records subject to judicial notice.  This is good news for trial practitioners since it alleviates the logistical headache of having a Secretary of State agent give live or affidavit testimony on corporate records at trial.

 

 

Indirect Evidence of E-mail Authenticity Not Enough in Architect’s Defamation Suit – IL ND (Part I of II)

An Illinois Federal court recently expanded on the reach of some common business torts, the grounds to vacate a default judgment, and the evidentiary vagaries of e-mail.

Strabala v. Zhang, 318 F.R.D. 81 (Ill. N.D. 2016), pits an architect against his former partners in a defamation and tortious interference suit based on accusations of unethical conduct and the diversion of partnership assets to foreign businesses.

The plaintiff alleged the defendants e-mailed plaintiff’s professional associates and falsely accusing him of forging signatures, pilfering software and tax fraud, among other things.

After a default judgment entered against them, the former partners moved to vacate the judgment and separately moved to dismiss the plaintiff’s suit for lack of subject matter and personal jurisdiction.

The court vacated the default judgment and partially granted the defendants’ motion to dismiss.  Some highlights of the court’s opinion:

Federal Rules 55 and 60 respectively allows a court to set aside a default order and default judgment.  These rules further the policy of having cases decided on their merits and not technicalities.

A party seeking to vacate an entry of default prior to the entry of final judgment must show: (1) good cause for the default; (2) quick action to correct it; and (3) a meritorious defense to the complaint.  The court found that the defendants satisfied the three-prong standard to vacate the default.

E-mail Evidence: Foundational Rules

The defendants sought to offer two emails into evidence – one allegedly sent by the plaintiff, the other received by him.

To lay a foundation for documentary evidence, the proponent (here the defendants) must submit evidence “sufficient to support a finding that the item is what the proponent claims it is.”  FRE 901(a).  The foundational standard is lenient. The proponent must only make a prima facie showing of genuineness; it is up to the court or jury to decide whether the evidence is truly authentic.

Here, the defendants failed to lay a foundation for the e-mails.  First, the plaintiff – variously, author and recipient of the e-mails – testified that he believed the e-mails may have been altered and did not concede their authenticity.

Next, the Court rejected Defendants’ argument that the e-mails were self-authenticating under FRE 902(7) – the rule governing inscriptions, signs, tags, or labels that indicate business origin, ownership, or control.

The court found that plaintiff’s electronic e-mail signature and a company letterhead logo were not “trade inscriptions” within the meaning of Rule 902(7) citing to a Seventh Circuit case holding that a trade inscription on the cover of an owner’s manual does not authenticate the contents of the manual.

Plaintiff rebutted the emails’ authenticity by testifying via declaration that he never electronically signed one e-mail and that the other e-mail was stored on his laptop’s hard drive – which a plaintiff claimed the defendants stole from him.

The court held that if the e-mails did originate from plaintiff’s stolen laptop, the evidence would be inadmissible since the laptop would be in defendants’ possession.

Q: So what kind of evidence would have satisfied the court?

A: Direct proof of authenticity.

Q: What would qualify as “direct proof”?

A: Testimony by Plaintiff or the other sender or someone who witnessed the sending of the emails who could attest that the questioned e-mails are the actual, unchanged emails sent by the authors.

The court noted that indirect evidence of authenticity could also work.  Indirect evidence typically involves testimony from “someone who personally retrieved the e-mail from the computer to which the e-mail was allegedly sent” together with other circumstantial evidence such as the e-mail address in the header and the substance of the email itself.

Here, the court found the defendants’ indirect evidence was too flimsy. It noted that the defendants were interested parties and accused of theft (plaintiff claimed they stole his laptop).  The court also held that the defendants’ self-serving testimony that they didn’t alter the e-mails wasn’t enough to establish their authenticity especially in light of plaintiff’s claims that the defendants stole his laptop and that the e-mails appeared to have been changed.

In the end, the court granted the plaintiff’s motion to strike the two e-mail exhibits to the defendants’ motion to dismiss.

Take-aways:

Given the rampantness of e-mail, this case is instructive for litigators since most cases will involve at least some e-mail evidence.  The case also underscores that while the standard for evidence authenticity is low, it still has some teeth.

Here, the plaintiff’s belief that the emails offered against him were doctored coupled with the fact that the e-mails’ source was stolen property (a laptop), was enough to create a question as to whether the e-mails were authentic.

The next post summarizes the Court’s exhaustive analysis of subject matter and personal jurisdiction under the Illinois long-arm statue and Federal due process standards.