Illinois Fraud and Civil Conspiracy Basics – Illinois Law

In Al Maha Trading v. Darley, 2014 WL 2459674 (N.D. Ill. 2014), the plaintiff brought fraud and civil conspiracy claims in connection with a fire truck sales contract.  The plaintiff, a Saudi Arabia-based fire and rescue services company, ordered six fire trucks and related equipment from the  Illinois-based defendant.

The plaintiff claimed the defendant submitted inflated invoices for the trucks and paid nearly $500k in secret kickbacks to plaintiff’s agent.

The Northern District denied defendant’s motion to dismiss and summarized Illinois fraud and civil conspiracy law in the process.

Fraudulent Misrepresentation and Omission

The elements of common law fraud are: (1) a false statement of material fact, (2) knowledge that the statement was false, (3) intent to induce the defendant to act, (4) reliance on the statement by the plaintiff; and (5) damages.

Fraudulent concealment has the same elements with the additional requirement that the plaintiff show the defendant omitted or concealed a material fact when it had a duty to disclose it.

The Court held that plaintiff’s claims of inflated invoices and bribes to plaintiff’s agent sufficiently alleged a misrepresentation (the false invoices) and concealment (failure to alert plaintiff to defendant’s bribe payments).

The plaintiff also adequately pled that the defendant knew the invoices were false, that plaintiff relied on them and sustained monetary damages by paying several million dollars for the trucks.

Civil Conspiracy

The Court also sustained the plaintiff’s civil conspiracy claim.  The plaintiff alleged that the defendant and plaintiff’s Fire  Chief conspired to submit excessive equipment price lists to the plaintiff so that defendant could make truck sales and cover the secret kickbacks to plaintiff’s agent.

To plead and prove a civil conspiracy in Illinois, the plaintiff must demonstrate (1) a combination of two or more persons, (2) for the purpose of accomplishing either an unlawful purpose or a lawful purpose by unlawful means, (3) concerted action, and (4) an overt tortious or unlawful act to further the plan.  (*8).

The Court found that plaintiff alleged all of these elements.  The combination consisted of defendant and the plaintiff’s agent who received the secret kickbacks.  The unlawful means consisted of defendant submitting swollen invoices and paying secret bribes to the agent.

While a conspiracy claim will normally not lie against a corporation acting through one of its officers based on agency rules (because the corporation can only act through its agents), that rule doesn’t apply in cases where the corporate officer actively participates in the tortious conduct.

Here, the plaintiff’s agent actively participated in the kickback scheme – an unlawful act taken in connection with accomplishing a lawful purpose – the sale of the fire trucks.  (*9).  As a result, the Fire Chief’s actions in arranging the bribes were separate from his role as a corporate agent.

Consumer Fraud Act – Can A Foreign Corporation Sue Under the Act?

The Court answered “yes.”  To determine whether a non-resident can invoke protections of the Illinois consumer fraud statute, the Court considers (a) the parties’ residence, (b) location of the transaction and of plaintiff’s contacts with defendant, (d) the place where the contracts were executed and performed, (e) where the deceptive statements were made, and (f) where payments were sent to and from. (*10).

The Court held that the plaintiff alleged enough of a connection with Illinois to allow it to sue for consumer fraud.  Plaintiff’s contacts with Illinois were initiated by defendant (an Illinois corporation) and the subject matter of the contract – the fire trucks – originated in and were shipped to plaintiff from Illinois.  Taken together, these factors led the Court to uphold the consumer fraud claim despite plaintiff’s foreign company status. (*10).

Afterwords:

– a foreign company can utilize the Illinois consumer fraud statute against an Illinois company – at least at the pleading stage;

–  a corporate officer who participates in a fraudulent scheme can be personally liable on a civil conspiracy claim.

 

 

Illinois Fraud Law, Corporate Opportunity Doctrine and Recoverable Damages – A Case Note

The Court also affirmed summary judgment on the plaintiff’s fraud claims against its former corporate President defendant in Star Forge, Inc. v. F.C. Mason Co., 2014 IL App (2d) 130527-U.  Plaintiff’s two-fold fraud claims were premised on (1) defendant misrepresenting to plaintiff the requirements of a big money contract involving John Deere so that a competitor of plaintiff’s got the contract and (2) defendant concealing his contractual relationship with different steel maker competitors.

In Illinois, fraud encompasses affirmative misrepresentations as well as omissions or concealment.  A fraud by omission plaintiff must show (1) defendant concealed a material fact under circumstances that created a duty to speak; (2) the defendant intended to induce a false belief, (3) the plaintiff could not have discovered the truth through reasonable inquiry or inspection, or was prevented from making a reasonable inquiry or inspection, (4) plaintiff relied on the defendant’s silence as a representation that the fact didn’t exist and (5) the concealed information was such that plaintiff would have acted differently had he been aware of it; and (6) plaintiff’s reliance resulted in damages.  (¶ 35).

Affirming the trial court’s fraud judgment for the plaintiff, the Second District held that the existence of a fiduciary relationship between plaintiff and defendant (the corporate President) obligated the defendant to apprise the plaintiff of material facts concerning the defendant’s other business dealings and that he violated this duty by hiding his financial interest in competing companies from the plaintiff.  The Court further found that the plaintiff established that its reliance on the defendant’s silence was equivalent to a representation that the defendant was not working for plaintiff’s competitors.  The plaintiff also showed that it would have acted differently in deciding which jobs to pursue with customers had it known the extent of plaintiff’s anti-competitive conduct and that plaintiff suffered damages as a result of its reliance on defendant’s silence.  (¶ 36).

The Court upheld the trial court’s damage award which equaled nine (9) years’ worth of compensation the plaintiff paid to the defendant during the time he was simultaneously representing both the plaintiff and competing steel companies.  In Illinois, a corporate officer who defrauds his company can be liable for the full forfeiture of compensation during the time he breaches his fiduciary duties or actively defrauds the company.   This is because a duty-breaching defendant isn’t entitled to compensation for the time span that he acts adversely to his employer’s interests.  The purpose of this damage rule is to deprive the wrongdoer of gains resulting from his breach of fiduciary duty.   A corporate plaintiff can recover both the compensation it paid to an unfaithful fiduciary as well as lost profits from competitors who benefitted from the fiduciary’s faithless conduct.  (¶ 48).(¶¶ 45-46, 48).

The Court rejected defendant’s set-off argument too: that plaintiff’s damages should be reduced or “set off” by the amount the plaintiff received from the settling corporate defendants.  But the Court refused to reduce plaintiff’s damages (lost profits against the corporate defendants plus the compensation paid out to the individual defendant) because the plaintiff’s injuries caused by the individual defendant differed from those caused by the corporate defendants.

The injury sustained as a result of the individual defendant’s (the corporate President) conduct was the loss of his impartial and undivided services during the time he was a corporate officer.  In contrast, the injury resulting from the corporate competitors’ conduct was the lost profits that the individual defendant steered away from the plaintiff and toward the competitors.

Afterword: This case shows that a fraud and breach of fiduciary duty plaintiff – at least in the corporate officer context – can recover both (1) compensation paid to the officer for the time span covering his breach as well as (2) lost profits against the competing businesses that reaped the benefits of the officer’s conduct.  It also illustrates that there is often factual overlap between breach of fiduciary duty claims and fraud claims against a corporate agent that violates his obligations of business loyalty to his corporate employer.

Condo Association Sues Developer Based on False Statements In Sales Brochure and For Anemic Repair Reserves

In Henderson Square Condominium Association v. LAB Townhomes, LLC, 2014 IL App (1st) 130764, a condominium association sued the developer and contractor after unit owners discovered wide-ranging property defects in their units. (For Chicago readers: the project is near that nightmarish, multi-cornered Belmont-Lincoln-Ashland intersection on the North side).

The property’s construction was completed in 1996, the unit owners discovered the property defects in 2007-2008 and filed suit in 2011 – nearly 15 years after construction was finished and about 4 years after discovery of the defects.  The extent of the unit damage wasn’t revealed until a consultant hired by the association opened up the unit walls and ceilings. 

The association sued for breach of implied warranty of habitability, fraud, negligence, for violating the Chicago Municipal Code section (Section 13-72-030) governing real estate marketing misrepresentations.  The trial court dismissed all the claims as time-barred.  The association appealed.

Result: Trial court reversed.  Association’s claims reinstated

Rules/reasoning:

The basis for the reversal was the defendants’ possible fraudulent concealment of the association’s causes of action.  Code Section 13-214(a)and (b) provide a four-year limitations and 10-year repose period for construction-related claims, respectively.  The construction repose period can have harsh results: it means that no matter when a plaintiff discovers an injury, if more than 10 years have elapsed since construction was complete, the plaintiff’s claim is barred.

But Code section 13-214(e) provides that the repose period doesn’t apply where a defendant makes fraudulent misrepresentations or fraudulently conceals a plaintiff’s claim.  735 ILCS 5/13-214(e); ¶ 28.  When fraud is involved, the five-year limitations period set forth in Code Section 13-205 (735 ILCS 5/13-205) applies.  To demonstrate fraudulent concealment, a plaintiff must show silence coupled with deceptive conduct or the suppression of material facts.  ¶¶ 95-96. 

The Court found a question of fact as to whether there was active concealment based on (1) defendants’ marketing documents: a sales brochure that made specific statements concerning unit insulation; and (2) the anemic repair reserves earmarked by the developer for repairs.  The Court held that if the defendants didn’t inform the plaintiff that the units lacked insulation – as the plaintiff’s consultant found and noted in its report – and if the reserve levels weren’t large enough to meet anticipated future repairs, this could show fraudulent concealment sufficient to beat the repose period argument.  (¶¶ 98- 102).

The Court also sustained the association’s claims that were premised on Municipal Code.  Sections 13-72-030 and 13-72-100 of the Code provide a real estate buyer both with a private cause of action and damages remedy (including attorneys’ fees) where a seller makes misrepresentations in the course of marketing the sale of real estate; including condominiums.  The First District found that the association stated a cause of action under the Ordinance and rejected the defendants’ argument that the Ordinance claims were duplicative of the association’s fraud claims.  The Court found the Ordinance gave rise to a private right of action and provided an additional remedy to a common law fraud claim.  (¶¶112-113).

Validating the plaintiff’s breach of fiduciary duty claim, the Court looked to the Illinois Condominium Act (“Act”). Section 9.2 of the Act imposes a duty on a developer to adequately fund a reserve account for future improvements and repairs.  765 ILCS  605/9(c)(1), (2).  A “reasonable reserve” amount is a fact-based inquiry determined by (1) repair and replacement costs, and the (2) estimated remaining useful life of the property’s various structural, mechanical and energy components and its common elements.  (¶¶ 122-123, 129). 

The Court held that the question of whether the developer adequately funded the repairs reserve account wasn’t properly decided on a Section 2-615 motion.  And since the association properly pled that the developer breached fiduciary duties by failing to disclose known, latent defects in the property, the association stated a valid claim for breach of fiduciary duty (or at least one that survives a motion to dismiss).

Take-aways:

The Court found that a breach of fiduciary duty claim against a developer can survive almost 15 years after the developer’s last involvement with the property (the property was completed in 1996 and suit wasn’t filed until 2011).  The case also underscores the importance of adequately funding reserve accounts and demonstrates that claims premised on the City Ordinance sections governing false statements in real estate sales literature can be brought independently of common law fraud claims.  Henderson Square also illustrates the evidentiary showing a plaintiff must make to trigger the fraudulent concealment exception to the 10-year repose period applicable to construction claims.