Tag: intentional tort

7th Cir. Addresses Guarantor Liability, Ratification Doctrine in Futures Trading Snafu

Straits Financial v. Ten Sleep Cattle, 2018 WL 328767 (N.D.Ill. 2018) examines some signature business litigation issues against the backdrop of a commodities futures and trading account dispute. Among them are the nature and scope of a guarantor’s liability, the ratification doctrine as applied to covert conduct and the reach of the Illinois consumer fraud statute.

The plaintiff brokerage firm sued a Wyoming cattle rancher and his company to recover an approximate $170K deficit in the defendants’ trading account. (The defendants previously opened a non-discretionary account with plaintiff for the purpose of locking in future livestock prices.)

The ranch owner counter-sued, alleging a rogue trader of plaintiff made unauthorized trades with defendants’ money over a three-month period.  Defendants counter-sued for consumer fraud, breach of fiduciary duty and conversion. After a seven-day bench trial, the court entered a money judgment for the defendants and the plaintiff appealed.

In substantially affirming the trial court, the Seventh Circuit first tackled the plaintiff’s breach of guaranty claim.  In Illinois, guarantees are strictly construed and a guarantor’s liability cannot extend beyond that which he has agreed to accept.  A proverbial favorite of the law, a guarantor is given the benefit of any doubts concerning a contract’s enforceability.  A guarantor’s liability is discharged if there is a “material change” in the business dealings between the parties and an increase in risk undertaken by a guarantor.

Here, the speculative trading account (the one where the broker made multiple unauthorized trades) differed vastly in form and substance from the non-discretionary account.

Since the two trading accounts differed in purpose and practice, the Court held that it would materially alter the guarantor’s risk if he was penalized for the plaintiff’s broker’s fraudulent trading spree.  As a result, the Seventh Circuit affirmed the trial judge’s ruling for the defendant on the guarantee claim.

The Court then rejected plaintiff’s ratification argument: that defendants’ authorized the illegal churned trades by not timely objecting to them
An Illinois agency axiom posits that a person does not have an obligation to repudiate an illegal transaction until he has actual knowledge of all material facts involved in the transaction. Restatement (Third) of Agency, s. 4.06.

Illinois law also allows a fraud victim to seek relief as long as he renounces the fraud promptly after discovering it. A party attempting to undo a fraudulent transaction is excused from strict formalism, too.

Here, the ranch owner defendant immediately contacted the plaintiff’s broker when he learned of the improper trades and demanded the return of all money in the non-discretionary trading account. This, according to the Court, was a timely and sufficient attempt to soften the impact of the fraudulent trading.

The Court affirmed the trial court’s attorneys’ fees award to the defendants on its consumer fraud counterclaim. The Illinois Consumer Fraud Act, 815 ILCS 505/10a(c)(the “CFA”) allows a court to assess attorneys’ fees against the losing party.

The plaintiff argued that the trial judge errored by awarding attorneys’ fees expended by defendants in both CFA and non-CFA claims. Plaintiff contended  the trial judge should have limited his fee award strictly to the CFA claim.

Rejecting this argument, the Seventh Circuit noted that under Illinois law, where statutory fraud (which allow for fees) and common law (which don’t) claims arise from the same operative facts and involve the same evidence at trial, a court can award all fees; even ones involved in prosecuting or defending non-fee claims. And since facts tending to prove fraudulent trading “were woven throughout [the] case and the work done to develop those facts [could] not be neatly separated by claim,” the District court had discretion to allow defendants’ attorneys’ fees claim incurred in all of its counterclaims and defenses.

The Court then reversed the trial judge’s holding that the defendants failed to mitigate their damages by not reading plaintiff’s trading statements or asking about his accounts.  A breach of contract or tort plaintiff normally cannot stand idly by and allow an injury to fester without making reasonable efforts to avoid further loss.

But here, since the plaintiff’s broker committed fraud – an intentional tort – any “contributory negligence” resulting from defendant not reading the mailed statements wasn’t a valid defense to the rogue broker’s fraudulent conduct.

Afterwords:

This case shows the length a court will go to make sure a fraud perpetrator doesn’t benefit from his improper conduct.  Even if a fraud victim is arguably negligent in allowing the fraud to happen or in responding to it, the court will excuse the negligence in order to affix liability to the fraudster.

This case also illustrates how guarantors are favorites of the law and an increase in a guarantor’s risk or a marked change in business dealings between a creditor and a guarantor’s principal will absolve a guarantor from liability.

Finally, Ten Sleep shows that a prevailing party can get attorneys’ fees on mixed fee and non-fee claims where the same core of operative facts underlie them.

Random Florida-to-Illinois Texts, Emails and Phone Calls Not Enough to Subject Fla. LLC to IL Jurisdiction

In McGlasson v. BYB Extreme Fighting Series, LLC, 2017 WL 2193235 (C.D.Ill. 2017), the plaintiff sued a Florida LLC and two Florida residents for pilfering the plaintiff’s idea to host MMA fights on cruise ships off the coast of Florida.

Plaintiff claimed that after he sent a rough video of the concept to them, the defendants hijacked the concept and then formed their own MMA-at-sea event, causing the plaintiff monetary damages.

All defendants moved to dismiss the plaintiff’s claims on the basis that they weren’t subject to Illinois jurisdiction.

The Court granted defendants’ motion to dismiss and in doing so, discussed the requisite contacts for an Illinois court to exercise jurisdiction over an out-of-state defendant who commits an intentional tort.

In breach of contract actions, personal jurisdiction turns on whether a defendant purposefully avails itself or the privilege of doing business in the forum state. With an intentional tort defendant, by contrast, the court looks at whether a defendant “purposefully directed” his conduct at the forum state.

Purposely directing activity at a state requires a finding of (1) intentional conduct, (2) expressly aimed at the forum state, with (3) defendant’s knowledge the effects would be felt in the forum state.  If plaintiff makes all three showings, he establishes that a defendant purposefully directed its activity at the forum state.

A plaintiff in an intentional tort case cannot, however, rely on his own unilateral activity to support jurisdiction over a defendant.  Similarly, a defendant’s contact with a third party with no connection to a forum state isn’t relevant to the jurisdictional analysis.

Here, the lone Illinois contacts alleged of defendants were a handful of emails, phone calls and text messages sent to the Illinois resident plaintiff.  To strengthen his case for jurisdiction over the Florida defendants, plaintiff alleged he suffered an economic injury in Illinois.

Rejecting plaintiff’s argument, the court viewed e-mail as not existing “in any location at all:”  instead, it bounces from server to server and the connection between where an e-mail is opened and where a lawsuit is filed is too weak a link to subject an out-of-state sender to jurisdiction in a foreign state.

The Court also noted that (a plaintiff’s) suffering economic injury in Illinois isn’t enough, standing alone, to confer personal jurisdiction over a foreign resident.  The focus is instead whether the defendant’s conduct “connects him to [Illinois] in a meaningful way.”

Since plaintiff’s MMA-at-sea idea had no connection to Illinois and the defendant’s sporadic phone calls, emails and texts weren’t enough to tie him to Illinois, the Court lacked personal jurisdiction over the Florida defendants.

Take-aways:

1/ In intentional tort setting, a foreign defendant’s conduct must be purposefully directed at a forum state for that state to exercise personal jurisdiction over the defendant;

2/ plaintiff’s unilateral actions vis a vis an out-of-state defendant don’t factor into the jurisdictional calculus;

3/ A defendant’s episodic emails, texts and phone calls to an Illinois resident likely won’t be enough to subject the defendant to personal jurisdiction in Illinois.