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No Automatic Finality Where Pleading Never Amended After ‘Without Prejudice’ Dismissal – IL Court

Richter v. Prairie Farms Dairy, Inc.’s, (2016 IL 119518) essential holding is that a prior dismissal without prejudice doesn’t convert to a final order for res judicata or appeal purposes where a plaintiff fails to amend the dismissed pleading within the time deadline set by the court and the movant defendant doesn’t seek a dismissal with prejudice.

Claiming their membership in an agriculture cooperative was unfairly terminated, the Richter plaintiffs sued the defendant co-op for statutory shareholder remedies under the Illinois Business Corporation Act, 805 ILCS 5/12.56 (BCA), and common law fraud. Plaintiffs’ key theory was that defendant prematurely and pretextually terminated a milk marketing agreement by invoking an obscure bylaws provision in the agreement.

The trial court dismissed plaintiffs’ fraud claims without prejudice and gave them 30 days to amend their complaint – a deadline ultimately increased to 120 days. Plaintiffs never amended their fraud claims though, instead choosing to pursue the BCA claim. After nearly five years of litigation, the plaintiff sought the voluntary dismissal of the BCA claim and later refiled another action within the one-year window allowed by 735 ILCS 5/2-1009.

The trial court granted the defendant’s 2-619 motion to dismiss the refiled suit under res judicata principles. It found the plaintiffs’ failure to amend the fraud claims “finalized” the prior dismissal without prejudice order and barred plaintiffs’ refiled suit.  The Fourth District reversed.  It held the trial court’s dismissal without prejudice was not final on its face and could never support a res judicata finding. Defendant appealed to the Illinois Supreme Court.

Affirming the appeals court, the Supreme Court dove deep into the earmarks of a final judgment for appeal and res judicata purposes and examined when an involuntary dismissal precludes the later refiling of a lawsuit.

Res judicata requires a final judgment on the merits for the doctrine to preclude a second lawsuit between two parties for the same cause of action. The doctrine bars not only what was actually decided in a prior action, but also matters that could have been litigated and decided in that action.

A “final” judgment or order denotes one that terminates the litigation and absolutely fixes the parties’ rights so that all that’s left is enforcing the judgment. (⁋24)
Illinois Supreme Court Rule 273 provides that an involuntary dismissal – other than one for lack of jurisdiction, improper venue, or failure to join an indispensable party – is considered an adjudication on the merits.

A dismissal “without prejudice” signals there was no final decision on the merits. A dismissal that grants a plaintiff leave to amend its pleading is not final because the dismissal does not terminate the litigation. (⁋25). In such a case, a plaintiff is not barred from refiling an action. s

The Illinois Supreme Court declined the defendant’s invitation to create an “automatic final judgment ” rule when a plaintiff fails to amend within court-imposed time limits. Instead, the Court placed the onus on the litigants to convert a non-final dismissal order into a final one by seeking a dismissal with prejudice once the time for amendments has lapsed. And since the defendant had the burden of showing that res judicata applied and failed to obtain a definite with prejudice dismissal of plaintiff’s claims, the plaintiff was not prevented from refiling their lawsuit.

But What About Rein and Hudson?

Rein v. David A. Noyes & Co., 172 Ill.2d 325, 334–35 (1996) and Hudson v. City of Chicago, 228 Ill.2d 462, 467 (2008) are oft-cited case law poster children for the perils of refiling previously (voluntarily) dismissed claims when other claims in the same suit were involuntarily dismissed. In such a case, a plaintiff’s refiled action can be barred by res judicata since the voluntarily dismissed claims could have been litigated in the earlier suit.  But here, unlike in Rein and Hudson, no part of plaintiff’s suit was dismissed with prejudice. And since a nonfinal order can never bar a subsequent action, res judicata didn’t apply.

Implication

When faced with a dismissal without prejudice, a plaintiff should quickly seek leave to amend or seek a dismissal with prejudice to start the notice of appeal clock. For its part, a defendant should seek with- prejudice dismissal language where a plaintiff fails to amend within time limits allowed by the court. Doing so will put the defendant in a good position to file a dismissal motion predicated on res judicata or claim-splitting if the plaintiff later refiles against the same defendant.

Filing Lawsuit Doesn’t Meet Conversion Suit ‘Demand for Possession’ Requirement – 7th Cir. (applying IL law)

Conversion, or civil theft, requires a plaintiff to make a demand for possession of the converted property before suing for its return.  This pre-suit demand’s purpose is to give a defendant the opportunity to return plaintiff’s property and avoid unnecessary litigation.

What constitutes a demand though?  The easiest case is where a plaintiff serves a written demand for return of property and the defendant refuses.  But what if the plaintiff doesn’t send a demand but instead files a lawsuit.  Is the act of filing the lawsuit equivalent to sending a demand?

The Seventh Circuit recently answered that with a “no” in Stevens v. Interactive Financial Advisors, Inc., 2016 WL 4056401 (N.D.Ill. 2016)

The plaintiff there sued his former brokerage firm for tortious interference with contract and conversion when the firm blocked plaintiff’s access to client data after he was fired.

The District Court granted summary judgment for defendant on the plaintiff’s tortious interference claim and a jury later found judgment for defendant on plaintiff’s conversion suit.

At the conversion trial, the jury submitted this question to the trial judge: “Can we consider [filing] the lawsuit a demand for property?”

The trial judge answered no: under Illinois law, filing a lawsuit doesn’t qualify as a demand for possession.  The jury entered judgment for the defendant and plaintiff appealed.

Affirming the jury verdict, the Seventh Circuit addressed whether impeding a plaintiff’s access to financial data can give rise to a conversion action in light of Illinois’s pre-suit demand for possession requirement and various Federal securities laws.

To prove conversion under Illinois law, a plaintiff must show (1) he has a right to personal property, (2) he has an absolute and unconditional right to immediate possession of the property, (3) he made a demand for possession, and (4) defendant wrongfully and without authorization assumed control, dominion, or ownership over the property.

The Court held that since the firm was bound by Federal securities laws that prohibiting it from disclosing nonpublic client information to third parties, coupled with plaintiff’s firing, the plaintiff could not show a right to immediate possession of the locked out client data.

The Seventh Circuit also agreed with the jury upheld the jury verdict on the insurance clients conversion suit based on the plaintiff’s failure to make a demand for possession.  The Court noted the plaintiff failed to demand the  return of his insurance client’s data before he sued.

And since Illinois courts have never held that the act of suing was a proxy for the required demand, the Seventh Circuit affirmed the jury verdict.

The Court also nixed the plaintiff’s “demand futility” argument: that a demand for possession would have been pointless given the circumstances of the given case. (Demand futility typically applies where the property has been sold or fundamentally damaged.)

The Seventh Circuit found that the jury properly considered the demand futility question and ruled against the plaintiff and there was no basis to reverse that finding.

Afterwords:

1/ A conversion plaintiff’s right to client data will not trump a Federal securities law protecting the data.  In addition, a pre-suit demand for possession is required to make out a conversion action unless the plaintiff can show that the demand is pointless or futile;

2/ Filing a lawsuit doesn’t dispense with the conversion tort’s demand for possession.

3/ A conversion plaintiff must make a demand for possession before suing even where the demand is likely pointless. Otherwise, the risk is too great that the lack of a demand will defeat the conversion claim.

 

Shocking! The Company That Owes You $ Dissolved: The Illinois Corporate ‘Survival’ Statute

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The Illinois corporate “survival” statute, 805 ILCS 5/12.80, allows a plaintiff to sue a dissolved corporation for up to five years after the corporation’s existence ends.  So, if a corporation was dissolved on April 29, 2014, a plaintiff who had a claim against the corporation prior to April 29, 2014, has through April 29, 2019 to file suit against that dissolved corporation. 

Any recovery would attach to corporate (as opposed to individual shareholder) assets.  And because the survival act is a legislative creation, its timing requirements are strictly construed and only relaxed in limited circumstances. 

The five-year claims period tries to strike a balance between protecting injured plaintiffs and setting a definite chronological end point for a dissolved corporation’s liability.

Michigan Indiana Condominium Association v. Michigan Place, LLC, 2014 IL App (1st) 123764 presents a recent example of a court’s rigid application of and the harsh results flowing from the five-year corporate survival period in a construction dispute involving various contractors.

In 2011, the plaintiff sued the general contractor for latent defects nine years after construction was complete.  The general contractor in turn filed third-party contribution claims against two masonry subcontractors in 2012.  Both subcontractor defendants were long defunct.  One subcontractor dissolved in 2003; the other, in 2006. 

The subcontractors moved to dismiss the general contractor’s claims under Code Section 2-619, arguing that the claims were time-barred since they were filed (in 2012) after the five-year survival period expired.  The trial court agreed and dismissed the contractor’s third-party claims.

Held: Affirmed.

In upholding the trial court’s dismissal of the general contractor’s third-party complaint, the First District stated the governing corporate law principles: 

– A corporation only exists under the express laws of the State in which it was created; 

– The right to sue a dissolved corporation (and the right of a dissolved corporation to sue) is limited to the time established by the legislature;

 – Corporation dissolution has the same legal effect as the death of a natural person;

 – Corporate survival actions are based on the legislative determination that corporate creditors should be able to sue a dissolved corporation and apply any corporate property to the debt;

 – Once the five-year survival period lapses, the corporation’s “life” also ends and no lawsuit can be filed against the corporation after the survival period expires;

– A dissolved corporation can be served with process through the Illinois Secretary of State (805 ILCS 5/1.01)

(¶¶ 12-13).

In certain situations, courts have relaxed the five-year survival period for public policy reasons.  Key exceptions to the five-year rule concern (1) actions involving minor plaintiffs; and (2) where there is an element of corporate misconduct and resulting unfairness.  (¶¶ 18-21).

  Here, since neither exception applied, the Court held that the survival act’s plain language dictated dismissal of the contractor’s third-party complaint.

 The Court recognized that barring the contractor’s claims was harsh since the contractor’s right to sue expired before it even knew it had claims against the defunct subcontractors. 

Yet because the statutory language was clear, the Court held that it was required to strictly apply the five-year survival rule and time-bar the contractor’s third-party action. (¶¶ 22-23). 

To bolster its decision, the Court noted that in legal and medical malpractice cases, courts strictly apply statutory repose periods (4 years for medical malpractice; 6 years for legal malpractice) that often doom injured plaintiff’s cases.  (¶ 24).  This gave the Court added precedential support for its rejection of the contractor’s third-party claims. 

Take-away: This case presents a good summary of the philosophical underpinnings and statement of the law governing actions by and against dissolved corporations.

Michigan Place also underscores that extending or relaxing a repose or survival period is a legislative (not a judicial) function.