Tag: fiduciary duty

Creditor (Bank) -Debtor (Borrower) Relationship Not A Fiduciary One – IL First Dist. (I of II)

Kosowski v. Alberts, 2017 IL App (1st) 170622 – U, examines some signature commercial litigation remedies against the factual backdrop of a business loan default.

The plaintiffs, decades-long business partners in the printing and direct mail industry, borrowed money under a written loan agreement that gave the lender wide-ranging remedies upon the borrowers’ default. Plaintiffs quickly fell behind in payments and went out of business within two years. A casualty of the flagging print media business, the plaintiffs not only defaulted on the loan but lost their company collateral – the printing facility, inventory, equipment and accounts receivable -, too.

Plaintiffs sued the bank and one of its loan officers for multiple business torts bottomed on the claim that the bank prematurely declared a loan default and dealt with plaintiffs’ in a heavy-handed way.  Plaintiffs appealed the trial court’s entry of summary judgment for the defendants.

Affirming, the First District dove deep into the nature and reach of the breach of fiduciary duty, consumer fraud, and conversion torts under Illinois law.

The court first rejected the plaintiff’s position that it stood in a fiduciary position vis a vis the bank. A breach of fiduciary duty plaintiff must allege (1) the existence of a fiduciary duty on the part of the defendant, (2) defendant’s breach of that duty, and (3) damages proximately resulting from the breach.

A fiduciary relationship can arise as a matter of law (e.g. principal and agent; lawyer-client) or where there is a “special relationship” between the parties (one party exerts influence and superiority over another).  However, a basic debtor-creditor arrangement doesn’t rise to the fiduciary level.

Here, the loan agreement explicitly disclaimed a fiduciary arrangement between the loan parties.  It recited that the parties stood in an arms’ length posture and the bank owed no fiduciary duty to the borrowers.  While another loan section labelled the bank as the borrowers’ “attorney-in-fact,” (a quintessential fiduciary relationship) the Court construed this term narrowly and found it only applied upon the borrower’s default and spoke only to the bank’s duties concerning the disposition of the borrowers’ collateral.  On this point, the Court declined to follow a factually similar Arkansas case (Knox v. Regions Bank, 103 Ark.App. 99 (2008)) which found that a loan’s attorney-in-fact clause did signal a fiduciary relationship.  Knox had no precedential value since Illinois case authorities have consistently held that a debtor-creditor relationship isn’t a fiduciary one as a matter of law. (¶¶ 36-38)

Next, the Court found that there was no fiduciary relationship as a matter of fact.  A plaintiff who tries to establish a fiduciary relationship on this basis must produce evidence that he placed trust and confidence in another to the point that the other gained influence and superiority over the plaintiff.  Key factors pointing to a special relationship fiduciary duty include a disparity in age, business acumen and education, among other factors.

Here, the borrowers argued that the bank stood in a superior bargaining position to them.  The Court rejected this argument.  It noted the plaintiffs were experienced businessmen who had scaled a company from 3 employees to over 350 during a three-decade time span.  This lengthy business success undermined the plaintiffs’ disparity of bargaining power argument

Take-aways:

Kosowski is useful reading for anyone who litigates in the commercial finance arena. The case solidifies the proposition that a basic debtor-creditor (borrower-lender) relationship won’t rise to the level of a fiduciary one as a matter of law. The case also gives clues as to what constitutes a special relationship and what degree of disparity in bargaining power is required to establish a factual fiduciary duty.

Lastly, the case is also instructive on the evidentiary showing a conversion and consumer fraud plaintiff must make to survive summary judgment in the loan default context.

 

‘Inquiry Notice’ Element of Discovery Rule Dooms Plaintiff’s Fraud in Inducement Claim – IL First Dist.

The First District recently discussed the reach of the discovery rule in the course of dismissing a plaintiff’s fraud claims on statute of limitations grounds.

The plaintiff in Cox v. Jed Capital, LLC, 2016 IL App (1st) 153397-U, brought a slew of business tort claims when he claimed his former employer understated its value in an earlier buy-out of the plaintiff’s LLC interest.

Plaintiff’s 2007 lawsuit settled a year later and was the culmination of settlement discussions in which the defendants (the former employer’s owner and manager) produced conflicting financial statements.  The plaintiff went forward with the settlement anyway and released the defendants for a $15,000 payment.

In 2014, after reading a Wall Street Journal article that featured his former firm, plaintiff learned the company was possibly worth much more than was previously disclosed to him.  Plaintiff sued in 2015 for fraud in the inducement, breach of fiduciary duty and breach of contract.

The trial court dismissed the claims on the basis they were time-barred by the five-year limitations period and the plaintiff appealed.  He argued that the discovery rule tolled the limitations period and saved his claims since he didn’t learn the full extent of his injuries until he read the 2014 article.

Result: Dismissal of plaintiff’s claims affirmed.

Q: Why?

A: A fraud claim is subject to Illinois’ five-year statute of limitations codified at Section 13-205 of the Code of Civil Procedure.  Since the underlying financial documents were provided to the plaintiff in 2008 and plaintiff sued seven years later in 2015.  As a result, plaintiff’s claim was time-barred unless the discovery rule applies.

In Illinois, the discovery rule stops the limitations period from running until the injured party knows or reasonably should know he has been injured and that his injury was wrongfully caused.

A plaintiff who learns he has suffered from a wrongfully caused injury has a duty to investigate further concerning any cause of action he may have.  The limitations period starts running once a plaintiff is put on “inquiry notice” of his claim.  Inquiry notice means a party knows or reasonably should know both that (a) an injury has occurred and (b) it (the injury) was wrongfully caused.  (¶ 34)

Fraud in the inducement occurs where a defendant makes a false statement, with knowledge of or belief in its falsity, with the intent to induce the plaintiff to act or refrain from acting on the falsity of the statement, plaintiff reasonably relied on the false statement and plaintiff suffered damages from that reliance.

Plaintiff alleged the defendants furnished flawed financial statements to induce plaintiff’s consent to settle an earlier lawsuit for a fraction of what he would have demanded had he known his ex-employer’s true value.  The Court held that since the plaintiff received the conflicting financial reports from defendants in 2008 and waited seven years to sue, his fraud in the inducement claim was untimely and properly dismissed.

Afterwords:

This case paints a vivid portrait of the unforgiving nature of statutes of limitation.  A plaintiff has the burden of establishing that the discovery rule preserves otherwise stale claims.  If a plaintiff is put on inquiry notice that it may have been harmed (or lied to as the plaintiff said here), it has a duty to investigate and file suit as quickly as possible.  Otherwise, a plaintiff risks having the court reject its claims as too late.

Joint Ventures, Close Corporations and Summary Judgment Motion Practice – IL Northern District Case Snapshot

The featured case is Apex Medical Research v. Arif (http://cases.justia.com/federal/district-courts/illinois/ilndce/1:2015cv02458/308072/52/0.pdf?ts=1447939471)

A medical clinical trials firm sued a doctor and his company for breach of contract and some tort claims when the firm learned the doctor was soliciting firm clients in violation of a noncompete signed by him.

In partially granting and denying a flurry of summary judgment motions, the Illinois Northern District highlights the importance of Local Rule 56 statements and responses in summary judgment practice. Substantively, the court provides detailed discussion of the key factors governing whether a business arrangement is a joint venture and what obligations flow from such a finding.

The clinical trials agreement contemplated that plaintiff would locate medical trial opportunities and then provide them to the doctor defendant.  The doctor would then conduct the trials in exchange for a percentage of the revenue generated by them.  The plaintiff sued when the parties’ relationship soured.

Procedurally, the court emphasized the key rules governing Local Rule 56 (“LR 56”) statements and responses in summary judgment practice:

– LR 56 is designed to aid the trial court in determining whether a trial is necessary; Its purpose is to identify relevant admissible evidence supporting the material facts.  LR 56 is not a vehicle for factual or legal arguments;

– LR 56 requires the moving party to provide a statement of material facts as to which the moving party contends there is no genuine issue;

– The non-moving party must then file a response to each numbered paragraph of the movant’s statement of facts and if it disagrees with any statement of fact, the non-movant must make specific reference to the affidavits and case record that supports the denial;

– A failure to cite to the record in support of a factual denial may be disregarded by the court;

– The non-movant may also submit its own statement of additional facts that require denial of the summary judgment motion;

– Where a non-movant makes evasive denials or claims insufficient knowledge to answer a moving party’s factual statement, the court will deem the fact admitted.

(**2-3)

The court focused its substantive legal analysis on whether the individual defendant owed fiduciary duties to the plaintiff.  Under Illinois law, a joint venturer owes fiduciary duties of loyalty and good faith to his other joint venturer.  So too does a shareholder in a close corporation (a corporation where stock is held in the hands of only a few people or family members) – but only if that shareholder is able to influence corporate policy and management.

The hallmarks of an Illinois joint venture are: (1) an express or implied association of two or more persons to carry out a single enterprise for profit; (2) a manifested intent by the parties to be joint venturers; (3) a community of interest (i.e. joint contribution of property, money, effort, skill or knowledge); and (4) a measure of joint control and management of the enterprise.  (*16).

The most important joint venture element is the joint control (item (4)) aspect.  Here, there were provisions of the parties’ written contract that reflected equal control and management of the clinical trials arrangement but other contract terms reflected the opposite – that the plaintiff could supervise the doctor defendant.  These conflicts in the evidence showed there was a genuine factual dispute on whether the parties jointly controlled and managed the trial venture.

The evidence was also murky as to whether the doctor defendant had enough control over the corporate plaintiff to subject the doctor to fiduciary obligations as a close corporation shareholder.  The conflicting evidence led the court to deny summary judgment on the plaintiffs’ breach of fiduciary duty claim. (**16-17).

Afterwords:

Procedurally, the case presents a thorough summary of the key rules governing summary judgment practice in Illinois Federal courts.  The party opposing summary judgment must explicitly cite to the case record for its denial of a given stated fact to be recognized by the court.

The case also provides useful substantive law discussion of the key factors governing the existence of a joint venture and whether a close corporation’s shareholder owes fiduciary duties to the other stockholders of that corporation.