Tag: privity

Company’s Fraud Suit Versus Rival’s Ex-CFO Defeated by Prior Arbitration Award: Illinois Res Judicata Basics

The privity element of the res judicata doctrine focuses on whether two parties to two separate lawsuits have legal interests that are so intertwined they should be treated as the same parties.  Privity is usually an easier question than the res judicata’s other well-settled components – whether the two cases stem from the same transaction and whether that first case was resolved via a final judgment on the merits.

In Alaron Trading Co. v. Hehmeyer, 2015 IL App (1st) 133785-U, the First District examines res judicata’s privity element through the lens of a trading firm suing an officer of a rival company for stealing clients and not paying referral fees where that rival previously won an arbitration award against the trading firm for breach of contract.

Facts and Chronology: In 2012, the corporate officer defendant’s former company won a $400,000 arbitration award against the plaintiff trading firm for prematurely terminating a year-long trading contract.  Several months after the arbitration award, the trading firm sued the corporate officer in state court for fraud and tortuous interference. The trial court granted defendant’s Section 2-619 motion, premised on res judicata.

Held: Affirmed.

Rules/Reasons:

– A motion under Code Section 2-619(a)(4) is the proper section to bring a res judicata motion;

– Res judicata requires an “identity of cause of action” between two separate legal proceedings (here, an arbitration case followed by a later court case);

– Res judicata can bar a defendant in one case from filing claims in a second case where the second case claims are based on the same facts as the plaintiff’s first case allegations.

– Separate claims are considered the same for res judicata purposes where they arise from a single group of operative facts, even though the causes of action are titled differently;

– Res judicata not only bars claims that were brought in an earlier case/arbitration, but also claims that could have been brought;

– Res judicata also requires “privity” between parties to two separate proceedings.  Privity applies where two parties are different in name but whose legal interests are substantially aligned such that an adjudication of one party’s rights in an earlier case will bind the second party in the second case;

– Quintessential privity relationships include members of partnerships and corporation and their officers, directors and shareholders;

(¶¶46-49, 56).

Here, all res judicata grounds were present.  The defendant in the state court case was the ex-CEO of the prior arbitration plaintiff.  In addition, the state court plaintiff (the trading firm and arbitration defendant) filed a voluminous counterclaim in the arbitration that was based primarily on the (state court) defendant’s conduct and that stemmed from the same underlying facts as the state court complaint.

Given his former CEO status, the defendant’s interests neatly aligned with those of his former employer – the arbitration plaintiff.  And since the court found that the state court plaintiff could have filed counterclaims against the defendant CEO in the earlier arbitration, res judicata applied and defeated plaintiff’s current court action.

Afterwords:

The lesson of this case is to file all possible claims against all possible parties that stem from the same underlying facts.  This is especially urgent where it looks like there is a possibility of multiple proceedings: that is, where successive lawsuits (or arbitrations) could be filed.  Otherwise, by holding back on claims in a prior case, a litigant could be foreclosed from filing claims in a second suit.

Square Footage Discrepancy Not Material Term in Chicago Office Lease Dispute

smart-office-furniture-image-2(photo credit: www.smartofficefurniture.ca)

 123 Madison Street Corp. v. Power & Dixon, 2013 IL App (1st) 122795-U examines a commercial lease dispute involving a law firm tenant.

The facts: in 2002, plaintiff’s predecessor (the former office building owner) entered into lease with defendant law firm. Over the next few years, the Lease was amended three times to cover three different office suites – each bigger than the last and each requiring increased rent payments. Tenant defaulted and the building’s management company filed suit. Tenant vacated and the parties went to trial on money damages. Over the course of several hearings, and after the court substituted in the current building owner as the plaintiff, the trial court entered judgment for landlord, awarding nearly $70,000 in back rent plus attorneys’ fees over over $12,000. The Tenant law firm appealed.

Held: Judgment for landlord affirmed.

Reasoning: The appeals court rejected the law firms three key arguments: (1) that there was no privity of contract between plaintiff and tenant; (2) plaintiff materially breached the lease by renting less space than called for in the lease and over-charging the tenant; and (3) the trial court erroneously found that tenant was leasing the office suite for a “flat-rate” instead of leasing for a specific square footage amount. (¶¶ 45-56).

On the privity issue (privity doctrine basically requires that a party have some contractual relationship with the party being sued), the Court noted that the plaintiff wasn’t the lessor.  

The original plaintiff was the former owner’s management company and the substituted plaintiff was the building’s current owner.

The Court held that privity was a question of standing (only a party to a contract has standing to sue on it) and an affirmative defense that had to be pled and proved by the tenant.  Since the tenant failed to raise the privity/lack of standing defense by affirmative defense or motion to dismiss, the tenant didn’t meet his burden of proving the plaintiff’s lack of standing to sue. (¶¶ 50-51).

Tenant also argued that the landlord’s material breach precluded it from suing to enforce the lease.  The tenant claimed that while the lease provided for nearly 4,000 square feet of rentable space, the landlord was only leasing under 3,000 square feet.  The tenant claimed it overpaid the landlord nearly $100,000 for the shortened space.

The court rejected this argument stating that there was no evidence that the precise number of square feet of rentable space was a material term.  One of the law firm’s principals even testified that the square footage wasn’t a make-or-break issue:  the firm simply wanted “more space” than the prior suite.

 The Court also affirmed the trial court’s finding that the tenant was agreeing to pay a “flat rate” rather than a specific price per square foot.  (¶¶ 52-55).

 Take-aways: I’ve represented commercial landlords where the lease will have changed hands multiple times from lease signing to the date of trial.  When representing a property manager whose name differs from the one on the lease, I move to admit in evidence any management agreement between the owner/lessor and the property manager.

Another case lesson is that a lease square footage discrepancy will only be considered a material term if the lease says so.