Tag: promissory fraud

Retailers’ Sales Forecasts Not Factual Enough to Buttress Fraud In Inducement Claim (IL ND)

The Northern District of Illinois provides a useful synopsis of Federal court summary judgment standards and the scope of some Illinois business torts in a dispute over a canceled advertising contract to sell hand tools.

The plaintiff in Loggerhead Tools, LLC v. Sears Holding Corp., 2016 WL 5111573 (N.D.Ill. 2016) sued Sears when it canceled an agreement to promote the plaintiff’s Bionic Wrench product and instead bought from plaintiff’s competitor.   The plaintiff claimed that after Sears terminated their contract, it was too late for the plaintiff to supply product to competing retailers.  Plaintiff filed a flurry of fraud claims alleging the department store giant made inflated sales forecasts and failed to disclose it was working with  plaintiff’s competitor.  Sears successfully moved for summary judgment on the plaintiff’s claims.

Summary Judgment Guideposts

Summary judgment is appropriate where the movant shows there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.  Courts deciding summary judgment must view the facts in the light most favorable to the nonmoving party only if there is a “genuine” dispute as to those facts.  A genuine fact dispute exists where a reasonable jury could return a verdict for the nonmoving party. 

The summary judgment movant has the initial burden of establishing an absence of a genuine fact dispute.  Once the movant meets this burden, it then shifts to the nonmovant/respondent who must point to specific evidence in the record that shows there is a genuine issue for trial.  But only “material” factual disputes will prevent summary judgment.  A fact is material where it is so important that it could alter the case’s outcome.

Fraud Analysis:

The crux of Plaintiff’s fraud suit was that Sears strung Plaintiff along by creating the false impression that Sears would market Plaintiff’s products.  Plaintiff alleged that Sears concealed its master plan to work with Plaintiff’s competitor and only feigned interest in Plaintiff until Sears struck a deal with a competing vendor.

An Illinois fraud plaintiff must show:  (1) defendant made a false statement of material fact, (2) defendant knew the statement was false, (3) the defendant intended the statement to induce the plaintiff to act, (4) the plaintiff justifiably relied on the statement’s truth, and (5) plaintiff suffered damages as a result of relying on the statement.

A bare broken promise doesn’t equal fraud.  An exception to this “promissory fraud” rule is where the defendant’s actions are part of a “scheme to defraud:” that is, the defendant’s actions are part of a pattern of deception.  The scheme exception also applies where the plaintiff can show the defendant did not intend to fulfill his promise at the time it was made (not in hindsight).

In determining whether a plaintiff’s reliance on a defendant’s misstatement is reasonable, the court looks at all facts that the plaintiff had actual knowledge of as well as facts the plaintiff may have learned through ordinary prudence.

Here, Sears’ sales forecasts were forward-looking, “promissory” statements of hoped-for sales results.  Sears’ profuse contractual disclaimers that sales forecasts were just “estimates” to be used “for planning purposes” only and “not commitments” prevented the Plaintiff from establishing reasonable reliance on the projections.

The court also rejected the plaintiff’s fraudulent concealment claim.  To prevail on a fraud claim premised on concealment of material facts, the plaintiff must show that the defendant had a duty to disclose the material fact.  Such a duty will arise where the parties have a special or fiduciary relationship that gives rise to a duty to speak.  

Parties to a contract are generally not fiduciaries.  Relevant factors to determine whether a fiduciary relationship exists include (1) degree of kinship of the parties, and (2) disparity in age, health, mental condition, education and business experience between the parties.

Here, there was no disparity between the parties.  They were both sophisticated businesses who operated at arms’ length from one another.

Afterwords: This case provides a good distillation of summary judgment rules, promissory fraud and the scheme to defraud exception to promissory fraud not being actionable.  It echoes how difficult it is for a plaintiff to plead and prove fraud – especially in the business-to-business setting where there is equal bargaining power between litigants.

This case provides a good distillation of summary judgment rules, promissory fraud and the scheme to defraud exception to the promissory fraud rule.  The case further illustrates the difficulty of proving fraud – especially in the business-to-business setting where there is equal bargaining power between the parties.

 

 

 

One Man’s ‘Outrage’ Is Another’s Petty Annoyance: Federal Court Tackles Promissory Fraud and Intentional Infliction Tort in Law Firm-Associate Spat

img_2052-3An Illinois Federal court expands on the contours of the IWPCA, promissory fraud, the employee vs. independent contractor dichotomy and the intentional infliction of emotional distress (IIED) tort in Lane Legal Services v. Le Brocq, 2016 WL 5955536,

The plaintiff law firm (“Firm”) sued a former associate (“Associate”) when he left to open his own law shop.  The Firm claimed the Associate stole firm business records, hacked into Firm computers and breached a written employment agreement.  The Associate fired back with multiple counterclaims against the Firm including ones for unpaid compensation under the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq., fraud, and IIED.

IWPCA Claim

The Court denied the Firm’s motion to dismiss the Associate’s IWPCA count.  The IWPCA requires an employer to pay final compensation to a separated employee no later than the next regularly scheduled payday.  Independent contractors, in contrast to employees, aren’t covered by the IWPCA.

The key question when deciding whether someone is an employee or an independent contractor is the level of control exerted over the plaintiff.  The more autonomy a plaintiff has in performing his job functions, the more likely he is deemed an independent contractor and not subject to the IWPCA.

Associate attorneys are generally considered employees under the IWPCA.  While the Associate here had a unique relationship with the Firm in the sense he was entitled to a share of the Firm’s fees, the Court ultimately found the Associate was an employee under the statute as the Firm could still dictate the details of the Associate’s legal work. 

‘Promissory’ Fraud

The Court found the Associate alleged enough facts for his fraud counterclaim to survive the Firm’s motion to dismiss.  In Illinois, a common law plaintiff must plead (1) a false statement of material fact, (2) knowledge or belief by the speaker that a statement is false, (3) intent to induce the plaintiff to act, (4) action by the plaintiff in reliance on the statement, and (5) damages.

Where fraud is predicated on forward-looking/future statements, the claim is a non-actionable “promissory fraud.”  An exception to this rule lies where the fraudulent conduct is part of a scheme to defraud – an exception that governs where there is a pattern of deceptive conduct by a defendant.  As few as two broken promises can amount to a scheme of defraud although that is not the norm. (**6-7).

The court found that the Associate’s allegations that the firm falsely stated it supported him “leaving the nest” and starting his own firm knowing it would later retaliate against him for doing so was factual enough to beat the Firm’s motion to dismiss.

Intentional Infliction of Emotional Distress (IIED)

The Court dismissed the associate’s intentional infliction claims finding that the Firm’s conduct, while possibly vindictive, still wasn’t objectively extreme and outrageous enough to sustain an IIED action.

An IIED plaintiff must show: (1) extreme and outrageous conduct, (2) the defendant’s intent to inflict severe emotional distress or knowledge that there was a high probability his conduct would inflict such distress, and (3) the conduct caused severe emotional distress.  Whether conduct rises to the level of extreme and outrageous is judged on an objective standard based on the facts of a given case and must be more than insults, threats, indignities, annoyances or petty trivialities.  To be actionable, the conduct must be “unendurable by a reasonable person.”

Illinois courts especially disfavor applying the IIED tort to employment settings since nearly every employee could conceivably have a claim based on everyday work stressors.

The Court found that the Firm’s challenged actions – filing a frivolous suit and bad-mouthing the associate to regulatory bodies – while inappropriate and bothersome, didn’t amount to extreme and outrageous conduct that would be unbearable to a reasonable person.  As a result, the Court dismissed the associate’s IIED claim.

Take-aways:

(1) A plaintiff can qualify as an employee under the IWPCA even where he shares in company profits and performs some management functions.  If the employer sufficiently controls the manner and method of plaintiff’s work, he likely meets the employee test;

(2) While promissory fraud normally is not actionable, if the alleged fraud is part of a pattern of misstatements, a plaintiff may have a viable fraud claim – even where there is as few as two broken promises;

(3) A colorable intentional infliction claim requires a showing of extreme and outrageous conduct that go beyond harsh business tactics or retaliatory conduct.  If the conduct doesn’t demonstrate an overt intention to cause mental anguish, it won’t meet the objective outrage standard.

 

Fraudulent Concealment In Illinois – Podiatry School Might Be On Hook for Omissions in School Catalog

A podiatry school alum may have a viable fraudulent concealment claim against the school for failing to warn him of evaporating job prospects in the foot doctor field.

That’s the key take-away from the Second District’s recent opinion in Abazari v. Rosalind Franklin University of Medicine and Science, 2015 IL App (2d) 140952, a case that considers what lengths an educational institution must go to in disclosing job placement rates and whether it can be held liable for failing to provide accurate data.

The plaintiff alleged he enrolled in the defendant’s podiatry program based on written representations contained in school brochures as well as oral statements made by high-ranking school officials.  Plaintiff claimed that the school failed to mention in its course catalog that there were too many students for available residency openings.  He also alleged that a school admissions officer misrepresented the school’s graduates’ loan default rates.  Plaintiff claimed both statements played a pivotal role in inducing plaintiff to enroll in the school.

Plaintiff’s fraud, negligent misrepresentation and fraudulent concealment claims were all dismissed with prejudice by the trial court.  Plaintiff appealed.

Partially reversing the dismissal of the fraudulent concealment claim, the Court stated the governing Illinois fraud rules that attach to student suits against higher education providers. These include:

To claim fraudulent concealment, a plaintiff must show (1) defendant concealed a material fact under circumstances that created a duty to speak, (2) 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, (4) plaintiff was justified in relying on defendant’s silence as a representation that a fact did not exist; (5) the concealed information was such that the plaintiff would have acted differently had he been aware of it; and (6) the plaintiff’s reliance resulted in damages.

Like a fraud claim, fraudulent concealment must involve an existing or past state of affairs; projections of future events will not support a fraud claim.  In addition, a party cannot fraudulently conceal something it doesn’t know.

A statement that is partially or “technically” true (a half-truth) can be fraudulent where it omits qualifying information – like the fact that successful completion of the podiatry program was no guarantee of a post-graduate residency. 

While a person may not enter into a transaction “with eyes closed” to available information, a failure to investigate is excused where his inquiries are impeded by someone creating a false sense of security as to a statement’s validity.

A duty to speak arises where the parties are in a fiduciary relationship or where one party occupies a position of superiority or influence over the other.  (¶¶ 27-30, 33, 37)

The Illinois Administrative Code played an important part in the court’s decision.  Under the Code, postsecondary institutions liked the defendant must accurately describe degree programs, tuition, fees, refund policies and “such other material facts concerning the institution and the program or course of instruction as are likely to affect the decision of the student to enroll.”  23 Ill. Adm. Code S. 1030.60(a)(7).

The Court held that since the school voluntarily mentioned how crucial it was for graduates to secure podiatric residency positions.  A shortage of residencies could be material to a prospective student’s enrollment decision.  As a result, the court found that plaintiff could possibly state a fraudulent concealment claim based on the school’s failure to disclose the existing shortfall in available residencies.  The court held that the plaintiff should be able to amend his fraudulent concealment claim to supply additional facts.  (¶¶ 37-38).

Afterwords:

The plaintiff’s claim is alive but it’s on life support.  The court did not decide that the plaintiff’s fraud claim had merit.  It instead found that the plaintiff could maybe make out a fraudulent concealment case if he can show the defendant college failed to disclose key jobs or residency data.

Still, this case should give pause not just to podiatric purveyors but to higher educational institutions across the board since it shows a court’s willingness to scrutinize the content of schools’ recruitment materials.  The case’s lesson is that if post-graduate job placement is a material concern (which it doubtlessly is), and if a school is able to keep student’s in the dark about future job prospects, then a student might have grounds for a fraud suit against his alma mater where it hides bleak post-graduate jobs stats from him.