Tag: seventh circuit

“Never Ending”(?) Contract Still Definite Enough to Be Enforced – 7th Circuit

Burford v. Accounting Practice Sales, Inc. 2015 WL2261108 (7th Cir. 2015), deftly handles some tricky and recurring contract interpretation and enforcement issues that arise where a business agreement lacks a clear end date.

In the case, the plaintiff sued defendant for terminating a written year-to-year (and automatically renewing) contract for the plaintiff to market defendant’s accounting practice sales services in various states throughout the Southern U.S.  The agreement provided that the defendant could not terminate the contract “unless it is violated by [plaintiff].”  The district court found this language signaled an indefinite (and therefore, at-will) contract and granted summary judgment for the defendant.  The plaintiff appealed.

Held: Reversed.

Q: How Come?

A: Because in Illinois, indefinite contracts – contracts with no objective termination date – aren’t favored but can still be enforced in certain cases.  This is because parties should be free to order their business affairs as they see fit and unless there is fraud, duress or undue influence, a written contract should be enforced as written.

Parties can get around indefinite duration provisions by specifically spelling out grounds for termination of a contract.  A contract that lacks a fixed duration and that can only be cancelled for a specific event or “for cause” can be enforced and won’t be treated as an at-will contract (one that can be ended at any time for any reason) so long as the event or cause can be objectively gauged.

Here, the contract language negated its at-will character.  It could only be terminated if the plaintiff breached (“unless” he violated it).  Otherwise, the contract kept renewing every year.  The court found this termination provision specific enough to be enforceable by the plaintiff.  Since there was no evidence that the plaintiff breached the contract – defendant unilaterally ended the contract – summary judgment for the defendant was improper.

Policy concerns also supported the court’s decision.  It noted that if the defendant was allowed to freely terminate the contract like it did here, it would deprive the plaintiff of the economic basis of his bargain.  Meaning the plaintiff could spend a lot of time and money developing and marketing the defendant’s brand and then once terminated, he could be replaced by someone who could capitalize on all his work.

Conversely, the defendant would suffer if the plaintiff could escape the contract with impunity since the plaintiff could leverage the good will and relationships he fostered over a several-year period and take that good will to another company or use it himself and against the defendant.  The defendant was protected from this contingency by inserting a one-year non-compete and by allowing for “good cause” termination; defined as poor sales performance.

Since the parties contracted around the indefinite duration problem by allowing for termination only if the plaintiff violated the contract, it wasn’t an at-will contract.

Afterwords:

1/ The case gives a good illustration of the problems that arise where parties don’t specify when and in what situation a contract ends.  By taking some pains at the outset to make clear when a contract starts and ends, and establishing what constitutes a breach of “cause” for termination, the contract participants can likely avoid future litigation when one side decides to walk away;

2/  Substantively, the case amplifies that a contract lacking an objective termination date will be treated as at-will contract and can be terminated by any party at any time;

3/ If a contract can be terminated for a single specified reason, this will likely make the contract enforceable even though the contract lacks an objective termination date.

 

 

Defective Lis Pendens In Wisc. Suit Doesn’t Warrant Contempt Sanctions Against NY Lawyer – Seventh Circuit Says

imageThe Seventh Circuit recently considered the scope of civil contempt of court and the range of permissible sanctions for an out-of-state attorney who misfiles a document that potentially impedes the sale of real estate.

In Trade Well International v. United Central Bank, (http://caselaw.findlaw.com/us-7th-circuit/1691932.html) a New York attorney admitted temporarily in Wisconsin to pursue a Federal case there mistakenly filed a construction lien when he meant to file a lis pendens in a replevin suit seeking the return of furnishings his client provided to a Wisconsin hotel.  The lien clouded the hotel’s title and put a wrench in the defendant’s efforts to sell it to a third party.

As a sanction for the faulty filing, the district judge revoked the lawyer’s pro hac vice status (this allows a lawyer from state to practice temporarily in another), held him in contempt and fined him $500.  The lawyer appealed.

Held: Reversed. The sanction was too harsh.

Q: Why?

A: Under Wisconsin law, a lis pendens must be filed whenever legal relief is sought affecting real property that could confirm or change interests in that property.  The lis pendens must be filed in the register of deeds for the county where the real estate is located.  Fixtures are classified as real property by Wisconsin statute.

When a lis pendens is filed, a subsequent purchaser or lender on the property is bound by the proceedings in the same manner as a party to the lawsuit.

A lis pendens prepared by a member of the Wisconsin Bar doesn’t have to be authenticated. But where a non-member of the Wisconsin Bar prepares it, the lis pendens must be authenticated (sworn to under oath by a public officer of the State).

The purpose of the lis pendens is to give constructive notice to third parties that there is a pending judicial proceeding involving real estate.  A  lis pendens differs from a construction lien in that (unlike the construction lien) it doesn’t create a lien on real property.

Here, the attorney’s lis pendens was facially deficient since it referenced Wisc’s construction lien statute and it wasn’t properly authenticated.

The court then discussed the applicable contempt of court nomenclature.  A contempt sanction is civil if it is “remedial” but criminal if “punitive.” Where a litigant or lawyer is punished for out-of-court conduct, the contempt is “indirect.” For criminal contempt, the court must give notice to the party that it is being charged (with criminal contempt) and must ask the government to prosecute the contempt.

Before holding someone in civil contempt, the court must specify what “unequivocal” court order or command was violated by the person being sanctioned.  An order of contempt is immediately appealable.

Reversing the district court’s contempt finding, the Seventh Circuit held it was unclear whether the contempt finding was criminal or civil since the trial judge didn’t specify in the order.

The record also showed that the attorney was at most negligent: he mistakenly recorded a lis pendens that referenced (but shouldn’t have) Wisconsin’s construction lien statute. The Seventh Circuit stressed that negligence or hasty drafting isn’t enough to support a finding of bad faith under the law.

Since the district court couldn’t articulate the basis for its contempt finding against the NY attorney and because there was no evidence of intentional conduct by him, the contempt sanctions were improper and the contempt order was vacated.

Take-aways:

1/ Out-of-state counsel must familiarize himself with applicable law in the jurisdiction he’s temporarily admitted to practice in and should probably retain local counsel to assist who is more versed in the specifics of the forum/foreign jurisdiction;

2/ A contempt order must specify whether it’s civil or criminal and must explicitly reference the court order that was violated;

3/ Criminal contempt has a due process component: the sanctioned party must be given notice and an opportunity to be heard and the government must prosecute the formal civil contempt proceeding.

Online Merchant Has No Duty to Protect Victims From Criminal Acts – Seventh Circuit 8.12.14

armslistThe Seventh Circuit recently examined the nature and scope of the legal duty owed by an Internet retailer to prevent a criminal attack on a third party.  In Vesely v. Armslist, LLC, (http://docs.justia.com/cases/federal/appellate-courts/ca7/13-3505/13-3505-2014-08-12.pdf) the plaintiff filed a wrongful death suit on behalf of his sister who was murdered by someone who purchased a handgun on Armslist.com (http://www.armslist.com), an electronic “firearms marketplace” that brokers gun sales between private parties.

The assailant (now serving a life sentence and not party to the civil suit) bought a gun off of Armslist from a private seller in Seattle, Washington.  He later shot the plaintiff’s sister after she spurned his (the gun buyer’s) advances.  Plaintiff sued the website operator, alleging wrongful death (predicated on negligence), statutory survival and a family expense claims.  All of plaintiff’s claims were premised on the allegation that the defendant had a duty to protect third parties from the criminal acts of users of the website.  The District court found there was no duty and granted the defendant’s motion to dismiss (12(b)(6) motion)).  The plaintiff appealed.

Held: Affirmed.  Gun selling site owes no duty to control the conduct of on-line purchasers.

Reasons:

The website operator didn’t owe the plaintiff a duty to protect third parties from the criminal acts of gun buyers.  In Illinois, the essential negligence elements are a duty of care owed by a defendant to the plaintiff, violation of that duty and an injury resulting from the violation.  Breach of duty and proximate cause are fact questions for a jury while the existence of a duty is a matter of law for the court to decide.

A private individual normally doesn’t owe a duty to affirmatively protect another from a criminal attack unless there is a ‘special relationship’ between the parties.  The four categories of special relationships are: (1) common-carrier and passenger (i.e. a train); (2) innkeeper and guest (i.e. hotel); (3) custodian-ward; and (4) business invitor and invitee.  (Armslist, p. 5).

Aside from the special relationship duty rule, courts can find a legal duty on public policy grounds.  The public policy factors that inform the court’s duty calculus are (1) reasonable foreseeability of the injury; (2) likelihood of the injury; (3) the magnitude of the burden of guarding against the injury; and (4) the consequences of placing the burden (of guarding against the injury) on the defendant. (p. 6).

A defendant also has a duty to refrain from “affirmative conduct” that creates a risk of injury to others and from actively assisting someone’s wrongful act.  But where the act that causes harm is criminal conduct (like the murder, here), there must be a special relationship for liability to attach. (p. 6).

The Court found the Armslist web operator had no legal duty to the plaintiff or his sister.  Since the operative act was a crime – a shooting – the special relationship rule applied.  The Court made a distinction between actively assisting gun buyers’ to commit crimes and simply serving as conduit for on-line gun purchases.  Since the defendant merely enabled consumers to use its site to buy guns, this didn’t equate to actively encouraging the buyers to commit illegal acts.  (p. 7).  And since there is no special relationship involving on-line merchants and consumers, there was no duty as a matter of law.

To bolster its holding, the Seventh Circuit noted that the Armslist site is a legal service and that the site contains profuse disclaimers that require the user’s acknowledgement that the defendant isn’t responsible for looking into whether parties to the on-line transaction have legal capacity to buy and sell guns.  Armslist’s standard terms also require the gun advertiser to certify that he/she will obey all applicable gun laws and will consult the ATF with firearms questions. (p. 2).  In light of these disclaimers and because there was no special relationship between Armslist and any of its users’ future crime victims, plaintiff was unable to establish that the defendant website operator owed a legal duty.

Afterwords:

A victory for on-line merchants who traffic in dangerous things and a corresponding  loss for gun control advocates.  The Court refused to saddle a classified advertising site with a legal duty to unknown third parties.  The Court enforced the defendant’s clear disclaimers that emphasized that it was not vetting either the gun seller’s or buyer’s qualifications for gun purchases or any red flags in their personal histories.

The Court solidifies the negligence law proposition that the existence and reach of a duty has limits – especially in the Internet sales context. If there is no recognized special relationship, there is no legal duty to protect against intervening criminal acts.