Tag: fraud in the inducement

Earned Bonus Is Proper Subject of Employee’s Wage Payment Claim; Reliance on Employer Pre-Hiring Statements Is Reasonable – IL ND

After leaving a lucrative banking position in Florida for a Chicago consulting gig, Simpson v. Saggezza’s (2018 WL 3753431 (N.D.Ill. 2018) plaintiff soon learned the Illinois job markedly differed from what was advertised.

Among other things, the plaintiff discovered that the company’s pre-hiring revenue projections were off as were the plaintiff’s promised job duties, performance goals and bonus structure.

When plaintiff complained, the Illinois employer responded by firing him. Plaintiff sued the defendants – the employer and a company decision maker – for unpaid bonus money under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1, et. seq. (IWPCA) and for other common law claims. Defendants moved to dismiss all claims.

In denying the bulk of the defendants’ motion, the Court discussed the nature and reach of earned bonus liability under the IWPCA in the context of a motion to dismiss.

The IWPCA defines payments as including wages, salaries, earned commissions and earned bonuses pursuant to an employment contract.  820 ILCS 115/12. An earned bonus is defined as “compensation given in addition to the required compensation for services performed.”  Il. Admin. Code, Title 56, s. 300.500.

The IWPCA allows an earned bonus claim only where an employer makes an unequivocal promise; a discretionary or contingent promise isn’t enough.  So as long as the plaintiff alleges both an employer’s unambiguous promise to pay a bonus and the plaintiff’s satisfactory performance of the parties’ agreement, the plaintiff can make out a successful IWPCA claim for an unpaid earned bonus.

Here, the plaintiff sufficiently alleged a meeting of the minds on the bonus issue – the defendant-employer unequivocally promised a $25,000 bonus if plaintiff met a specific sales goal – and that the plaintiff met the goal.

The court then partially granted the employer’s motion to dismiss the plaintiff’s statutory and common law retaliation claims.

IWPCA Section 14(c) prevents an employer from firing an employee in retaliation for the employee lodging a complaint against the employer for unpaid compensation. 820 ILCS 115/14(c).  Since the plaintiff alleged both an agreement for earned bonus payments and that he was fired for requesting payment, this was enough to survive a motion to dismiss.

The court did, however, dismiss plaintiff’s common law retaliatory discharge claim.  To prevail on this claim, a plaintiff must allege (1) he was terminated, (2) in retaliation for plaintiff’s conduct, and (3) the discharge violates a clearly mandated public policy.

The Court rejected the plaintiff’s argument that an IWPCA violation was enough to trigger Illinois public policy concerns. The court held that to invoke the public policy prong of the retaliation tort, the dispute “must strike at the heart of a citizen’s social rights, duties and responsibilities.”  And since the Court viewed an IWPCA money dispute to a private, economic matter between employer and employee, the employer’s alleged IWPCA violation didn’t implicate public policy.

Lastly, the Court denied the defendant’s motion to dismiss plaintiff’s fraud in the inducement claim.  In this count, plaintiff alleged he quit his former Florida job in reliance on factual misstatements made by the defendant about its fiscal health, among other things.

To sufficiently plead fraudulent inducement, a plaintiff must allege (1) a false statement of material fact, (2) known or believed to be false by the person making it, (3) an intent to induce the other party to act, (4) action by the other party in reliance on the truth of the statement, and (5) damage to the plaintiff resulting from the reliance.  To be actionable, a factual statement must involve a past or present fact; expression of opinions, expectations or future contingencies cannot support a fraudulent inducement claim.

Where there is a disparity in knowledge or access to knowledge between  two parties, the fraudulent inducement plaintiff can justifiably rely on a representation of fact even if he could have discovered the information’s falsity upon further investigation.

While the defendant argued that the predicate fraud statements were non-actionable embellishments or puffery, the court disagreed.  It found that plaintiff’s allegations that defendant made factually false statements about the defendant’s financial state and the plaintiff’s job opportunities were specific enough to state a claim.

The court noted that plaintiff alleged the defendants supplied plaintiff with specific financial figures based on historical financial data as part of their pre-hiring pitch to the plaintiff. Taken in totality, the information was specific and current enough to support a fraud claim.

Afterwords:

Earned bonuses are covered by IWPCA; discretionary or conditional bonuses are not;

The common law retaliation tort has teeth. It’s not enough to assert a statutory violation to implicate the public policy element.  A private payment dispute between an employer and employee – even if it involves a statutory violation – won’t rise to the level of a public policy issue;

An employer’s false representations of a company’s financial status can underlie a plaintiff’s fraud claim since financial data supplied to a prospective hire is information an employer should readily have under its control and at its disposal.

‘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.

Broken Promises In Medical Services Agreement Don’t Equal Fraud – IL Court

An Illinois appeals court recently examined the promissory fraud rule in a medical services contract dispute.

The key principle distilled from the court’s unpublished analysis in Advocate Health and Hospitals Corp. v. Cardwell, 2016 IL App (4th) 150312-U is that where fraud claims are based on false promises of future conduct, the claims will fail.

The plaintiff hospital there sued a former staff doctor for breaching a multi-year written services contract. When the doctor prematurely resigned to join a hospital in another state, the plaintiff sued him to recover about $250,000 advanced to the doctor at the contract’s outset.

The doctor counterclaimed, alleging the hospital fraudulently induced him to sign the contract. He claimed the hospital broke promises to elevate him to a Director position and allow him to develop a new perinatology practice group at the hospital.  Since the promises were false, the doctor claimed, the underlying services contract was void.

Siding with the hospital (it granted the hospital’s summary judgment motion), the Court discussed when a defendant’s fraudulent inducement can nullify a written contract.

In Illinois, to establish fraud in the inducement, a plaintiff must show (1) a false statement of material fact, (2) defendant’s knowledge the statement was false, (3) defendant’s intent to induce the plaintiff’s reliance on the statement, (4) plaintiff’s reasonable reliance on the truth of the statement, and (5) damages resulting from reliance on the statement.

A critical qualification is that the fraud must be based on a misstatement of existing fact; not a future one.  Fraud in the inducement goes beyond a simple breaking of a promise or a prediction that doesn’t come to pass.

Here, the Court found that the hospital’s pre-contract statements all involved future events. The promise of a Directorship for the doctor was merely aspirational. It wasn’t a false statement of present fact.   The Court also determined that the hospital’s representations to the doctor about the development of a perinatology program spoke to a hoped-for future event.

Since the entirety of the doctor’s fraud counterclaim rested on the hospital’s promises of future conduct/events, the Court entered summary judgment against the doctor on his fraud in the inducement counter-claim.

Afterwords:

This is another case that sharply illustrates how difficult it is to prove fraud in the inducement; especially where the alleged misstatements refer to contingent events that may or may not happen.  While a broken promise may be a breach of contract, it isn’t fraud.

For a misstatement to be actionable fraud, it has to involve an actual, present state of affairs. Anything prospective/future in nature will likely be swallowed up by the promissory fraud rule.