Illinois Supreme Court Upholds Noncompetition Agreements

RELIABLE FIRE EQUIPMENT COMPANY v. Arredondo, Ill: Supreme Court 2011 - Google Scholar:

This case was recently decided by the Illinois Supreme Court to "correct" a misconception that Illinois no longer recognizes that a noncompetition agreement must support a legitimate business interest of the employer.

The Court described the three-prong test as follows: "¶ 17 "The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test." BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999). A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public. Id.;Restatement (Second) of Contracts § 187 cmt. b, § 188(1) & cmts. a, b, c (1981).^[2] Further, the extent of the employer's legitimate business interest may be limited by type of activity, geographical area, and time. Restatement (Second) of Contracts § 188 cmt. d (1981). This court long ago established the three-dimensional rule of reason in Illinois and has repeatedly acknowledged the requirement of the promisee's legitimate business interest down to the present day."

The Court explained that Illinois recognizes the legitimate business interest test. It noted: "¶ 43 In sum, the legitimate business interest test is still a viable test to be employed as part of the three-prong rule of reason to determine the enforceability of a restrictive covenant not to compete. However, the two-factor test created in Kolar, in which a near-permanent customer relationship and the employee's acquisition of confidential information through his employment are determinative, is no longer valid. Rather, we adopt the position of Justice Hudson's special concurrence, which is: whether a legitimate business interest exists is based on the totality of the facts and circumstances of the individual case. Factors to be considered in this analysis include, but are not limited to, the near-permanence of customer relationships, the employee's acquisition of confidential information through his employment, and time and place restrictions. No factor carries any more weight than any other, but rather its importance will depend on the specific facts and circumstances of the individual case."

The court then remanded the case to the Circuit Court to allow that court to apply the proper test.

Comment: it appears that this opinion resolves a debate in the caselaw concerning the legitimate business interest test. Although it is far from certain, considering the legitimate business interest of the employer would appear to strengthen the employer's ability to enforce a reasonable noncompetition agreement.

'via Blog this'

Read More

Illinois Company Held Liable For Agent Who Wrongfully Obtained Employee's Phone Records

Lawlor v. North American Corp. of Illinois, 949 NE 2d 155 - Ill: Appellate Court, 1st Dist., 4th Div. 2011 - Google Scholar:

This is an Illinois case in which the plaintiff, Kathleen Lawlor, obtained an award of compensatory and punitive damages against her former employer.

The court characterized Lawlor's claim as follows: "The parties engaged in four years of bruising discovery, but the testimony at the six-day trial was relatively uncomplicated. Lawlor was aggrieved that North American, through surreptitious means, acquired her mobile and home phone records in a failed effort to prove that she breached the company's noncompetition agreement. Painted with a broad brush, Lawlor presented evidence at trial to the effect that North American, through counsel and at least two independent investigators, set about the tasks of personal surveillance and getting her private phone records."

Again the bad conduct of the defendant supported the Appellate Court's decision to reinstate the punitive damages award of $1.75 million.

The court wrote: "Here, we conclude that the jury's award of $1.75 million was reasonable given North American's reprehensible conduct. The nature and the inappropriateness of the intrusive conduct in meddling with plaintiff's personal records was sufficiently malevolent to warrant punitive damages, especially considering that North American on multiple occasions, over a five-month period, specifically utilized the wrongfully obtained phone records. While several of its officers and employees testified that they were unaware of the methodology of how the records were obtained and whether unethical or illegal means were utilized, North American points to no evidence showing it was uncomfortable with the receipt or the use of this private information. To the contrary, North American employees testified that they had no hesitancy in using the phone records and that they never inquired how they were obtained. In terms of the size of the award, the jury heard that North American's net worth was approximately $50 million. It can scarcely be argued that the amount awarded by the jury was egregiously high, given both the nature of the conduct and the extent of defendant's net worth."

Edward X. Clinton, Jr.

'via Blog this'

Read More

Seventh Circuit Weighs In On Unjust Enrichment Debate

Cleary v. PHILIP MORRIS INCORPORATED, Court of Appeals, 7th Circuit 2011 - Google Scholar:

The Seventh Circuit recently affirmed the dismissal of an "unjust enrichment" class action against Philip Morris. Plaintiffs alleged that Philip Morris was unjustly enriched because it conspired to conceal the facts about the addictive and dangerous nature of cigarettes.

The Seventh Circuit frames the issue as follows: "A preliminary matter argued by the parties is whether Illinois law recognizes an independent cause of action for unjust enrichment, or whether unjust enrichment must always be tied to another underlying claim found in tort, contract, or statute."

The Court then notes that the Illinois cases are not entirely clear on whether unjust enrichment is a separate cause of action or whether it must be tied to an underlying cause of action, such as fraud or breach of fiduciary duty.

The Seventh Circuit summarizes the conflicting cases as follows: "The Illinois Supreme Court appears to recognize unjust enrichment as an independent cause of action. In Raintree Homes, Inc. v. Vill. of Long Grove, 807 N.E.2d 439, 445 (Ill. 2004),the plaintiffs were seeking the refund of overpaid fees under an unjust enrichment theory. No other underlying cause of action was alleged. The Court noted: "Here, plaintiffs have no substantive claim grounded in tort, contract, or statute; therefore the only substantive basis for the claim is restitution to prevent unjust enrichment." Id. Similarly, in another case before theIllinois Supreme Court, Indep. Voters v. Ill. Commerce Comm'n, 510 N.E.2d 850, 852-58 (Ill. 1987), the plaintiffs had filed suit to recover refunds for excessive utility charges and their claim for restitution of the charges was not tied to another cause of action. Finally, the IllinoisSupreme Court has articulated the elements of unjust enrichment without reference to a separate underlying claim in tort, contract, or statute. See HPI Health Care Servs., 545 N.E.2d at 679; see also Peddinghaus v. Peddinghaus, 692 N.E.2d 1221, 1225 (Ill. App. Ct. 1998)(ruling that Illinois recognizes an independent cause of action for unjust enrichment based on HPI Health Care Services). From these cases, it appears that the Illinois Supreme Court recognizes unjust enrichment as an independent cause of action.

In contrast to this case law, there is a recent Illinois appellate court that suggests the opposite, namely, that an unjust enrichment claim cannot stand untethered from an underlying claim. See Martis v. Grinnell Mut. Reinsurance Co., 905 N.E.2d 920 (Ill. App. Ct. 2009). The Martis court stated the following:

The doctrine of unjust enrichment underlies a number of legal and equitable actions and remedies. Unjust enrichment is not a separate cause of action that, standing alone, will justify an action for recovery. Rather, it is a condition that may be brought about by unlawful or improper conduct as defined by law, such as fraud, duress, or undue influence, and may be redressed by a cause of action based upon that improper conduct. When an underlying claim of fraud, duress or undue influence is deficient, a claim for unjust enrichment should also be dismissed.

Id. at 928 (internal quotation and citations omitted) (emphasis added)."

The Seventh Circuit then offers its own suggested resolution to the debate: "Without setting out a comprehensive treatise on Illinois unjust enrichment law in an attempt to resolve the apparently conflicting language of the Raintree Homes and Martis cases, we suggest one way to make sense of it. Unjust enrichment is a common-law theory of recovery or restitution that arises when the defendant is retaining a benefit to the plaintiff's detriment, and this retention is unjust. What makes the retention of the benefit unjust is often due to some improper conduct by the defendant. And usually this improper conduct will form the basis of another claim against the defendant in tort, contract, or statute.^[2] So, if an unjust enrichmentclaim rests on the same improper conduct alleged in another claim, then the unjustenrichment claim will be tied to this related claim—and, of course, unjust enrichment will stand or fall with the related claim. See, e.g., Ass'n Benefit Servs. v. Caremark Rx, Inc., 493 F.3d 841, 855 (7th Cir. 2007) ("[W]here the plaintiff's claim of unjust enrichment is predicated on the same allegations of fraudulent conduct that support an independent claim of fraud, resolution of the fraud claim against the plaintiff is dispositive of the unjust enrichment claim as well.")."

After offering this suggestion to resolve the conflicting cases, the Seventh Circuit affirms the dismissal of the unjust enrichment claim on the ground that the plaintiffs failed to state a claim because they failed to allege a detriment tied to the wrongful conduct of the defendant.

The Illinois Supreme Court may ultimately weigh in on this issue. The Seventh Circuit's opinion offers a possible resolution to the debate.

Edward X. Clinton, Jr.

Read More

Warning Extortion Scam - "Sam Wilson"

This is another warning from this firm that a criminal extortion ring is using our name to threaten people to collect nonexistent debts.

If you are contacted by a "Sam Wilson" please note that we employ no such person.

These are criminals who are using our name wrongfully and using throw away cell phones.  We have contacted law enforcement to no avail.  We will continue to do everything in our power to stop these people.

The number they use is 872-213-9369.

Please contact law enforcement immediately if these people contact you.

Ed Clinton, Jr.

Read More

Criminal Case Glut Impedes Civil Suits - Consider Mediation

Criminal Case Glut Impedes Civil Suits - WSJ.com:

In Chicago, civil cases still move faster in federal court.  However, they are often bumped to make room for federal criminal cases.  This results in somewhat long delays if you insist on going to trial.

What the federal court does a great job of is mediating cases - many cases are resolved by the magistrate judges who do a great job of holding mediations and forcing the parties to attend.

I haver participated in numerous federal mediations over the years - only one case failed to reach a settlement.  That case settled one week later.  The Magistrate Judges of the Northern District of Illinois do a great job in resolving disputes.

The Seventh Circuit also does mediations - it too does a great job in getting rid of small cases and cases that are not worth the effort of the judges.

In my opinion, the mediation programs of the Northern District of Illinois and the Seventh Circuit are among the most useful tools for litigators in the world of litigation.  They also save clients lots of legal fees.

Edward X. Clinton, Jr.

'via Blog this'

Read More

Under Uniform Commercial Code Supplier Can Terminate Distributor

ECHO, INCORPORATED v. TIMBERLAND MACHINES & IRRIGATION, INC., Court of Appeals, 7th Circuit 2011 - Google Scholar:

This is a commercial case in which Echo terminated its business relationship with Timberland Machines & Irrigation, Inc. (TMI) a distributor. Echo then turned that particular sales territory over to another distributor.

Echo sued TMI to recover on unpaid invoices and TMI sued Echo claiming that the distributor agreement was improperly terminated.

The easy issue is the unpaid invoices. Echo brought an account stated claim under Illinois law. The district court granted summary judgment in favor of Echo. As is typical in these cases, the issue was delivery and acceptance. Because the goods were delivered to TMI and accepted by TMI, TMI was obligated to pay under the UCC. As the court holds:

"TMI accepted the goods at issue, and thus is contractually obligated to pay the interest stated on the invoice under the Uniform Commercial Code, codified at 810 Ill. Comp. Stat. 5/2-207 (West 2011); See K-Koncrete, Inc. v. Mack Trucks, Inc., No. 85 C 9538, 1987 WL 9337, at *7 (N.D. Ill. Apr. 3, 1987) ("Illinois law . . . impose[s] a contractual duty to pay interest on a party who (1) accepts goods accompanied by an invoice stating an interest obligation and (2) offers no objection to the stated terms") (referencing U.C.C. § 2-207(2)(c)); Inspec Foams, Inc. v. Claremont Sales Corp., No. 01 C 8539, 2002 WL 1765630, at *3 (N.D. Ill. July 30, 2002) (under section 5/2-207, "overdue payment interest penalty clauses in a seller's shipping documentation are not considered material alterations of the parties' contract and thus are incorporated into the parties' contract terms"); Extel Corp. v. Cermetek Microelectronics, Inc.,539 N.E.2d 320, 323 (Ill. App. Ct. 1989) (buyer required to pay interest pursuant to the terms set forth in seller's invoices where "there was no showing that acceptance was limited to the terms of the offer or that plaintiff objected to the interest provision within a reasonable time"). We affirm the interest award."

Comment: as always, the account stated claim is very difficult to resist when the buyer takes delivery of the goods and uses them in its business.

Edward X. Clinton, Jr.
'via Blog this'

Read More

AGRI-BEST HOLDINGS, LLC v. ATLANTA CATTLE EXCHANGE, INC, Dist. Court, ND Illinois 2011 - Google Scholar

AGRI-BEST HOLDINGS, LLC v. ATLANTA CATTLE EXCHANGE, INC, Dist. Court, ND Illinois 2011 - Google Scholar:

The District Court for the Northern District of Illinois has held that a secured creditor has the right - under the Uniform Commercial Code - to step into the shoes of the debtor and pursue collection of outstanding receivables.

This entry cannot begin to do proper justice to the excellent opinion of the District Judge.

Edward X. Clinton, Jr.
'via Blog this'

Read More

Corporate Law - LLC Statute Shields Member From Personal Liability

Carollo v. Irwin, Ill: Appellate Court, 1st Dist., 4th Div. 2011 - Google Scholar:

The Illinois Appellate Court recently decided the above-captioned case. The case is routine - plaintiff was to receive certain funds if a parcel of real estate did not sell in a specific time period. The court concluded that there was no sale, and thus the plaintiff was entitled to the additional money.

The Court also included a lengthy and thoughtful discussion of the Illinois Limited Liability Company Act - specifically the Act's provision regarding the personal liability of a member who signs a contract on behalf of the LLC.

The Court attempted to determine whether a third party - Scott Mason - who signed a contract on behalf of an LLC that was never formed could be held personally liable on that contract. The Court comments: "Second, we also hold that there was no sale because there was no enforceable contract due to the fact that there was no party who could be held liable as a buyer. The LLC was never formed and thus never ratified the contract on behalf of the LLC or gave Scott Mason authority to enter into the contract."

The Court then held that the Limited Liability Company Act gives greater protection to the person who signs a contract on behalf of an LLC that is never formed than a person who signs on behalf of a corporation that is never formed:

"48 Defendants argue that the articles of agreement were valid even if the unformed LLC could not be held liable because the individual who signed, Scott Mason, would then be personally liable. However, here there is an important distinction between corporations and LLC's that neither party recognizes which is dispositive of this issue. We explain that, by statute, as a matter of law Scott Mason cannot be personally liable.

¶ 49 Defendants contend that H.F. Philipsborn, Tin Cup Pass, and Estate of Plepel all stand for the proposition that courts will impose personal liability on individuals who incur corporate debts prior to corporate formation. However, we note that the result in H.F. Philipsborn andTin Cup Pass was the opposite of the result sought here by defendants; the corporations were held liable, not the individual, because the corporations were ultimately formed and adopted and ratified the contracts. See H.F. Philipsborn, 59 Ill. 2d at 472; Tin Cup Pass, 195 Ill. App. 3d at 851. In Estate of Plepel, on the other hand, the decedent's estate was liable because there was no evidence that the parties intended to hold the corporation liable, or that the claimants even knew they were dealing with a corporation. Estate of Plepel, 115 Ill. App. 3d at 807-08.

¶ 50 In determining whether a corporate officer has contracted in his own behalf, we apply the general rules of agency. Polivka v. Worth Dairy, Inc., 26 Ill. App. 3d 961, 966 (1974). The question of whether an agency relationship exists is normally a question of fact; however, a court may decide the issue as a matter of law if only one conclusion may be drawn from the undisputed facts. Ioerger v. Halverson Construction Co., 232 Ill. 2d 196, 202 (2008) (citingChurkey v. Rustia, 329 Ill. App. 3d 239, 243 (2002)). The common law rule is that where an agent signs contract in his own name and the contract nowhere mentions the existence of agency or the identity of the principal, the agent is personally liable and parol evidence is not admissible to rebut the presumption of the agent's personal liability. Bank of Pawnee v. Joslin, 166 Ill. App. 3d 927, 935 (1988). A corporate officer who signs his name on a contract, without more, is individually liable on the contract. 84 Lumber Co. v. Denni Construction Co.,212 Ill. App. 3d 441, 443 (1991).

¶ 51 On the other hand, when an agent signs a document and indicates next to his signature his corporation affiliation, then, absent evidence of contrary intent in the document, the agent is not personally bound. Central Illinois Public Service Co. v. Molinarolo, 223 Ill. App. 3d 471, 475 (1992) (citing Knightsbridge Realty Partners, Ltd-75 v. Pace, 101 Ill. App. 3d 49, 53 (1981)). Directors or other officers of corporations are not liable for the debts contracted in the name of, and on behalf of, the corporation and which are binding upon it unless they are expressly made liable by statute or unless they also contract on their own behalf. Polivka, 26 Ill. App. 3d at 966. "`One of the purposes of a corporate entity is to immunize the corporate officer from individual liability on contracts entered into in the corporation's behalf.'" People ex rel. Madigan v. Tang, 346 Ill. App. 3d 277, 284 (2004) (quoting National Acceptance Co. of America v. Pintura Corp., 94 Ill. App. 3d 703, 706 (1981)). However, an unauthorized agent purporting to enter into a contract for a principal is personally liable. Polivka, 26 Ill. App. 3d at 966.

¶ 52 Here, Scott Mason clearly indicated he was signing the articles of agreement on behalf of Cal City Apartments, LLC, thus seemingly insulating himself from liability. See Baker v. Daniel S. Berger, Ltd., 323 Ill. App. 3d 956, 969 (2001) (holding that the individual's signature on the face of the agreement was clear that he signed the agreement in his representative capacity on behalf of the corporation and therefore would not be personally bound). However, the LLC was never formed and so it never adopted and ratified the articles of agreement for deed. Thus, it would appear that Scott Mason should be liable on the contract, as he acted without authority of the LLC because the LLC was never formed and therefore never ratified his action in entering the articles of agreement.

¶ 53 However, there is an important statutory distinction between LLC's and corporations that provides members or managers of unformed LLC's with more protection from personal liability than officers of corporations in this context. Section 3.20 of the Business Corporation Act of 1983 specifically directs:

"All persons who assume to exercise corporate powers without authority to do so shall be jointly and severally liable for all debts and liabilities incurred or arising as a result thereof." 805 ILCS 5/3.20 (West 2006).

¶ 54 The Limited Liability Company Act had a provision similar to section 3.20 of the Business Corporation Act. Prior to its amendment, section 10-10 provided:

"(b) A manager of a limited liability company shall be personally liable for any act, debt, obligation, or liability of the limited liability company or another manager or member to the extent that a director of an Illinois business corporation is liable in analogous circumstances under Illinois law." 805 ILCS 180/10-10(b) (West 1996).

¶ 55 However, when the legislature amended section 10-10 of the Limited Liability Company Act in 1997, it specifically removed the provision that allowed a member or manager of an LLC to be held personally liable for the unauthorized exercise of corporate powers in the same manner as provided in the Business Corporation Act. Puleo v. Topel, 368 Ill. App. 3d 63, 69-70 (2006). See Pub. Act 90-424 (eff. Jan. 1, 1998) (deleting 805 ILCS 180/10-10(b) (West 1996)).

¶ 56 In addition, the remaining provisions of the Limited Liability Company Act provide that a member or manager is not liable for acting on behalf of an LLC:

"A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager." 805 ILCS 180/10-10(a) (West 2006).

¶ 57 Section 10-10(a) of the Limited Liability Company Act provides the only means by which an individual can be liable for contracts entered into on behalf of an LLC:

"(a) Except as otherwise provided in subsection (d) of this Section, the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company." 805 ILCS 180/10-10(a) (West 2006).

¶ 58 Subsection (d) in turn provides that an LLC member can be liable to a third party for debts or obligations only if: (1) there is a provision to that effect in the LLC's articles of organization; and (2) the member has consented in writing to that provision. 805 ILCS 180/10-10(d) (West 2006).

¶ 59 Subsection (c) further provides that "[t]he failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company." 805 ILCS 180/10-10(c) (West 2006).

¶ 60 We have recognized the clear legislative intent to shield individuals from personal liability in transactions on behalf of LLCs, where the LLC did not exist because it was dissolved. In Puleo, we held that a managing member was not personally liable for debts that an LLC incurred after its dissolution because there was no evidence of a provision establishing the managing member's personal liability was contained in the LLC's articles of organization or that the managing member consented in writing to the adoption of such a provision, which are the requirements of section 10-10(d) of the Limited Liability Company Act. Puleo, 368 Ill. App. 3d at 68. We declined to imply into the Limited Liability Act a provision similar to section 3.20 of the Business Corporation Act that would hold an individual member liable for obligations incurred when the member was without authority because the LLC was not in existence. Puleo, 368 Ill. App. 3d at 69. We held that "[a]s we have not found any legislative commentary regarding that amendment, we presume that by removing the noted statutory language, the legislature meant to shield a member or manager of an LLC from personal liability." Puleo, 368 Ill. App. 3d at 69. Thus, other than the very limited circumstances specified in section 10-10(d), there is no individual liability for members for any debts and obligations entered into on behalf of an LLC even where, as here, such acts were unauthorized due to the fact that the LLC had not yet been formed.

¶ 61 Here, there is no evidence that the requirements of section 10-10(d) were met, and thus there is no basis for holding Scott Mason bound by the contract. While in Puleo the LLC was dissolved at the time the contract was entered into, whereas here the LLC was never formed in the first place, the holding of Puleo is equally applicable, as in both instances the LLC was not in existence at the time of contract. In this case it is undisputed that the LLC was never formed, and there is no evidence offered by defendants that there were articles of organization providing for Mason's liability, nor any writing in which Scott Mason agreed to be liable. See Puleo, 368 Ill. App. 3d at 68 (independent contractors could not establish a managing member's personal liability for debts that the LLC incurred after its dissolution without showing that a provision establishing the managing member's personal liability was contained in the LLC's articles of organization and that the managing member consented in writing to the adoption of such a provision). Thus, Scott Mason could not be held individually liable for the articles of agreement for deed because he is statutorily shielded from liability. Therefore, neither the unformed LLC nor Scott Mason could be held liable on the contract and the articles of agreement could not be enforced."

This is an interesting and thoughtful discussion on the Limited Liability Company Act that demonstrates a close reading of the statute.

Edward X. Clinton, Jr.

www.clintonlaw.net

'via Blog this'

Read More

Warning - Collection Scam

We have learned that certain scam artists are using our name and calling individuals to attempt to collect nonexistent obligations.  The calls are coming from area code 872.  We do not collect debts owed by individuals and warn anyone receiving such communications to disregard them and to notify local law enforcement.  We do not contact any individual debtors ever - so if someone is using our name to collect from individuals you can be certain that the caller is involved in a scam.

One of the numbers used was 872-213-9369.

Sadly, this scam has continued.  Now victims are being contacted by an edwardclinton@live.com.  This is not us and we do not collect from individuals or make any threats.

We have reported this to various law enforcement agencies to no avail.

Read More

Seventh Circuit Construes Written Contract With Confusing Handwritten Amendment

QUALITY OIL, INCORPORATED v. KELLEY PARTNERS, INCORPORATED, Court of Appeals, 7th Circuit 2011 - Google Scholar:

This is a classic case of contract interpretation. Lawyers often become alarmed when they learn that their clients have made handwritten amendments to their written contracts. Here Quality Oil and Kelley Partners entered into a transaction under which Quality loaned Kelley $150,000. The loan was to be forgiven over a five year period as Kelley purchased certain motor oil products from Quality.

The confusion was created when the clients added a handwritten clause to the Agreement as follows:

"On July 1, 2003, Quality Oil, an Indiana auto-lubricants distributor for Exxon Mobil Corp., and Kelley Partners, an independent operator of automotive quick-lube facilities in Illinois, entered into a "Product Payback Loan and Supply Agreement." Under the Agreement, which by its terms is governed by Indiana law, Quality Oil agreed to loan Kelley Partners $150,000 "at no cost," and Kelley Partners in turn agreed to purchase its motoroil requirements from Quality Oil.^[1] Specifically, in Paragraph 4 of the Agreement, Kelley Partners agreed to

purchase from Quality Oil . . . at least eighty-five percent (85%) of [Kelley Partners'] requirements of motor oils during the term of this Agreement. [Kelley Partners] further agrees to purchase not less than two hundred twenty-five thousand (225,000) gallons of Mobil motor oil and 225,000 Mobil branded filters within 60 months from the date hereof.

Immediately following this language in the typewritten contract is the handwritten notation that is central to Kelley Partners' appeal. It states as follows: "This Supply Agreement will terminate after 225,000 gallons and 225,000 filters of Exxon/Mobil is purchased or 60 months, whichever comes first." The president of Kelley Partners and owner/general manager of Quality Oil initialed this handwritten provision and signed the Agreement in two places."

Quality Oil sued Kelley and the district court entered summary judgment in favor of Quality Oil. The Seventh Circuit affirmed and explained its reasoning as follows:

"The same is true of Kelley Partners' interpretation of the contract at issue here. It would make no commercial sense for Quality Oil to forgive its loan to Kelley Partners after five years regardless of how much motoroil product Kelley Partners purchased. This was a loan and supply contract, after all. Under Paragraph 4 of the Agreement, Kelley Partners bound itself to purchase at least 85% of its motor-oil needs from Quality Oil during the term of the Agreement. Paragraph 6 and Exhibit A imposed a Premature Termination Penalty on any early termination, and Paragraph 7 required that if Kelley Partners sold its business, it was to assign its obligations to its successor or remain liable under the Agreement. Reading the contract as a whole and harmonizing all of its provisions shows that Kelley Partners' literal interpretation of the handwritten provision is commercially absurd."

Kelley argued that the contract expired in 60 months so it had no duty to repay the loan. The Seventh Circuit held that this was incorrect and would make the contract commercially unreasonable.

Comment: cases like this one cause corporate lawyers to tear their hair out - but the Court did an excellent job of deciphering the true meaning of the contract.

Edward X. Clinton, Jr.

Read More

The Necessary Steps To Collect a Business Debt

1. Before selling any goods or rendering a service, make the customer/debtor sign a written agreement, preferably one providing that the customer must pay legal fees if he does not pay.

2. Deliver the goods or service and make sure that the debtor acknowledges the receipt of same.

3. Invoice the debtor.

4. Send a reminder invoice.

5. Send emails or written correspondence to the debtor that support your position that the debtor accepted the goods and/or services.

6. Try to negotiate a resolution with the debtor, including offering a payment plan.

7. Initiate collection action.

By far the most important step is to document the transaction in writing so that the debtor cannot claim that the goods and/or services were not delivered.

Edward X. Clinton, Jr.

Read More

Asset Exchange II, LLC v. First Choice Bank, Illinois Appellate Court

In this recent decision of the Illinois Appellate Court for the First District, the Court rejected a claim by a borrower that the 365/360 interest calculation method violated the Illinois Interest Act. According to the Court, Asset Exchange is a limited liability company owned by "two sophisticated businessmen." On December 14, 2007, Asset Exchange entered into a commercial loan agreement with the Defendant Bank whereby the Bank agreed to loan $1,250,000 to Asset Exchange. The interest rate was 8.25%, computed on a 365/360 basis. The loan states: "'the annual interest rate for this Note is computed on a 365/360 basis; that is by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.'" Plaintiff claimed that, by using a year of less than 365 days, the Bank was wrongfully using a definition of "year" that was in violation of the Illinois Interest Act and thus charged and received more interest than was due. The Bank moved to dismiss on the ground that the Interest Act does not apply to commercial loans. The trial court agreed and the Appellate Court affirmed. The Appellate Court noted that prior Illinois decisions have held that the Interest Act does not apply to corporations. See Computer Sales Corp. v. Rousonelos Farms, Inc., 190 Ill. App. 3d 388, 392 (1989). The Appellate Court rejected the breach of contract claim because (a) the terms of the Note were unambiguous and (b) the Bank complied with the terms of the Note. Comment: this is a victory for Banks as the 365/360 interest calculation method is commonly used in commercial transactions. Edward X. Clinton, Jr.

Read More

What Statute of Limitations Applies to A Claim That A Mortgage Was Unconscionable?

Estate of Davis v. Wells Fargo Bank, 633 F. 3d 529 - Court of Appeals, 7th Circuit 2011 - Google Scholar



The Seventh Circuit affirmed the dismissal of the plaintiff's claim against Wells Fargo Bank, which took over the servicing of a predatory mortgage loan.



The plaintiff asserted claims for unconscionability and fraud under Illinois law. The Seventh Circuit noted that the fraud and unconscionalbility claims were subject to a five-year statute of limitations. See 735 ILCS 5/13-205.



The dismissal of the fraud claim was affirmed by the Seventh Circuit on the ground that Davis disputed the charges and failed to pay them.



The Court explained: "On appeal, Mrs. Davis contends that the district court erred in not also considering the defendants' demands that she pay her loan, demands that continued even after the defendants knew that the Kankakee County court had ruled that her loan was based in part on Mortgage Express's fraud. We agree that overlooking this allegation was incorrect. Statements made to induce someone to pay a purported debt that they do not actually owe, if made with the requisite knowledge and intent, can support an allegation of fraud. See Hartigan v. E & E Hauling, Inc., 153 Ill.2d 473, 180 Ill.Dec. 271, 607 N.E.2d 165, 175-77 (1992) (allegations that contractor's letter sent to a metropolitan authority contained material misrepresentations as to contractor's compliance with minority business enterprise contract requirements, made for purpose of inducing authority's reliance in paying contract installment, supported allegation of common-law fraud). However, we agree with the district 537*537 court that Davis's fraud claim still fails for a different reason. Even though Mrs. Davis alleged that the defendants attempted to induce her to pay money that they knew she did not owe, Mrs. Davis did not allege that she had relied on the defendants' demands for payment or that she had suffered any damages as a result of those demands. To the contrary, with the help of her attorney, she fought those unjustified demands. Without reliance or damages, Mrs. Davis does not have a viable claim for fraud. We affirm the district court's dismissal of Mrs. Davis's fraud claim."



Comment: Illinois does not recognize attempted fraud. To sue for fraud the aggrieved party must allege damages.



The Breach of Contract claim of unconscionability was barred by the five-year statute of limitations.



The court reasoned: "Under Illinois law, a contract may be found to be unconscionable as a matter of law on either a "procedural" or "substantive" basis, or both. Razor v. Hyundai Motor America, 222 Ill.2d 75, 305 Ill.Dec. 15, 854 N.E.2d 607, 622 (2006). Procedural unconscionability refers to a situation in which a term is so difficult to find, read, or understand that the party could not fairly be said to have been aware she was agreeing to it. Procedural unconscionability also takes into account the party's relative lack of bargaining power. Razor, 305 Ill.Dec. 15, 854 N.E.2d at 622, citing Frank's Maintenance & Engineering, Inc. v. C.A. Roberts Co., 86 Ill.App.3d 980, 42 Ill.Dec. 25, 408 N.E.2d 403, 410 (1980). Substantive unconscionability, on the other hand, refers to contractual terms which are inordinately one-sided in one party's favor. Razor, 305 Ill.Dec. 15, 854 N.E.2d at 622, citing Rosen v. SCIL, LLC, 343 Ill.App.3d 1075, 278 Ill.Dec. 770, 799 N.E.2d 488, 493 (2003).



Mrs. Davis has not shown that the district court erred when it barred consideration of the formation of her mortgage contract in September 1999 on statute of limitations grounds. In this federal lawsuit, Mrs. Davis was not using the doctrine of unconscionability in its most familiar way, as an affirmative defense to bar enforcement of a contract or a particular term of a contract. See, e.g., Razor, 305 Ill.Dec. 15, 854 N.E.2d at 622-24 (holding that exclusion of consequential damages in limited warranty was not enforceable because it was unconscionable). Mrs. Davis instead sought damages from the successors in interest to the original lender. We do not address here whether unconscionability gives rise to a standalone claim for damages under Illinois law, as Mrs. Davis asserts here. We do not address that issue because even if such a claim is cognizable in Illinois, it is clear that such a claim would be barred by the five-year statute of limitations."



Edward X. Clinton, Jr.

Read More

Illinois Court Holds That Judgment Obtained By Unlicensed Bill Collector is Void

LVNV FUNDING, LLC v. Trice, Ill: Appellate Court 2011 - Google Scholar

This case could have a broad ranging impact on the debt collection industry as it holds that an unlicensed bill collection firm's judgment against a debtor is void as a matter of law.

The Court held that the judgment debtor can attack a void judgment under Section 2-1401 without showing diligence. It wrote:"Trice has adequately alleged that before it filed the lawsuit, LVNV had not registered as a collection agency, as required by the Illinois Collection Agency Act (Act) (225 ILCS 425/14, 14b (West 2008)). But Trice did not raise this issue before the trial court entered a final judgment against him on LVNV's complaint. Trice raises the issue only in a section 2-1401 petition for relief from the judgment. Finally, Trice claims that LVNV's failure to register makes the judgment in its favor void, and not merely voidable.

When the trial court enters a void judgment, a party aggrieved by the judgment may attack it in a section 2-1401 motion without showing diligence. "[T]he allegation that the judgment or order is void substitutes for and negates the need to allege a meritorious defense and due diligence." Sarkissian v. Chicago Board of Education, 201 Ill. 2d 95, 104 (2002)."

The Appellate Court then reasoned that because the collection agency had committed a crime in attempting to collect without a license, the judgment was void.

"A party who acts as a collection agency without proper registration commits a Class A misdemeanor and must also pay a civil penalty. 225 ILCS 425/4.5, 14, 14b (West 2008).

Assuming the truth of the allegations in Trice's section 2-1401 motion, that LVNV had not registered as a collection agency before it sued Trice, LVNV committed one crime when it purchased the debt from Citibank (see 225 ILCS 425/3(d) (West 2008)), and it committed a second crime when it filed the complaint. See 225 ILCS 425/14 (West 2008).

Williston states the general rule that applies here:

"When a contracting party is required to have a license to engage in a business and violation of required licensing statute is made a crime, a contract calling for performance in violation of this requirement is illegal and void." 10 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts §19.47, at 562 (4th ed. 1993).

The rule follows from the "elementary principle[] of contract law *** that an illegal contract is void ab initio." People v. Caban, 318 Ill. App. 3d 1082, 1089 (2001). In support of the general rule, Williston cites Reilly v. Clyne, 234 P. 35, 37 (Ariz. 1925), for the proposition that "where a statute pronounces a penalty for an act, a contract founded on the act is void.""

Comment: this decision is consistent with the current trend of courts attempting to rein in collection agencies. There have been reports in the press and in the cases of debt collectors attempting to obtain a judgment where the debt collector does not own the debt.

Edward X. Clinton, Jr.

Read More

Greenberger v. GEICO General Ins. Co., 631 F. 3d 392 - Court of Appeals, 7th Circuit 2011 - Google Scholar

Greenberger v. GEICO General Ins. Co., 631 F. 3d 392 - Court of Appeals, 7th Circuit 2011 - Google Scholar

The Seventh Circuit has affirmed the dismissal of a proposed class action by a policyholder against GEICO insurance.

Plaintiff alleged that GEICO had a practice of omitting necessary repairs from auto collision damage estimates and that he was damaged thereby.

The Seventh Circuit summarized the allegations and procedural history as follows:

"Though legally distinct, Greenberger's contract and fraud claims are all premised on the same basic factual allegation: that GEICO systematically omits necessary repairs from its collision-damage estimates in violation of the promise to restore the policyholder's vehicle to its preloss condition. The district court sidestepped the class-certification question, dismissed the statutory consumer-fraud claim, and then entered summary judgment for GEICO on 395*395the breach-of-contract and common-law fraud counts. Greenberger appeals."

The Seventh Circuit affirmed the dismissal of the case in all respects, finding that the fraud claims were really breach of contract claims dressed up as fraud claims.

"We affirm. All of Greenberger's claims are foreclosed by the Illinois Supreme Court's comprehensive decision in Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill.2d 100, 296 Ill.Dec. 448, 835 N.E.2d 801 (2005). Among other important holdings, Averyestablished the common-sense proposition that a policyholder's suit against his insurer for breach of its promise to restore his collision-damaged car to its preloss condition cannot succeed without an examination of the car. Id., 296 Ill.Dec. 448, 835 N.E.2d at 826. Greenberger gave away his car, and without it, he cannot prove that what GEICO paid him was inadequate to restore the car to its preloss condition.

Avery also made clear that fraud claims must contain something more than reformulated allegations of a contractual breach. Id., 296 Ill.Dec. 448, 835 N.E.2d at 844. Greenberger alleges that GEICO never intended to restore his car to its preloss condition and failed to disclose that it regularly breaches this contractual promise. These are breach-of-contractallegations dressed up in the language of fraud. They cannot support statutory or common-law fraud claims."

Comment: this was an attempt to resurrect a type of class action against an auto insurer. In Illinois, these claims do not work. They can be brought on an individual basis, but the plaintiff must retain the car for examination to determine if the insurance company acted appropriately.

Edward X. Clinton, Jr.

Read More

Harvard Law Society of Illinois

Thanks to the Harvard Law Society of Illinois for hosting today's lunch to discuss small firm practice.

Thanks to Daniel Ebner and Stacy Austin, the hosts of today's event.

Edward X. Clinton, Jr.

Read More

Seventh Circuit Interprets A "Best Efforts" Clause In a Contract

Peter Denil and Gerald Nardella v. Deboer, Inc.,Et Al - The American Lawyer

The Seventh Circuit has issued a decision interpreting a series of contracts involving the aborted sale of a business.

Ronald DeBoer started a trucking business known as deBoer Transportation in 1967. In 2007, he and the other family members wanted to sell the business and retire. (Given what happened, it appears that DeBoer was not willing to retire or sell the business.)

There were two contracts (a) an employment agreement and (b) a stock-purchase contract.

The employment contract provided that one of the plaintiffs, Peter Denil, would become the CEO of DeBoer. The other plaintiff, Gerald Nardella, would become the Executive Vice President. DeBoer became an Executive Vice President. He held the right to discharge the plaintiffs with or without cause. If the discharge was without cause, plaintiffs would receive additional payments.

The stock-purchase contract called for Denil to buy 4% of DeBoer's stock for $500,000 and for Nardella to buy 2% for $250,000. The closing date was set for April 15, 2009. The parties agreed that the failure to purchase the stock by April 15, 2009, the plaintiffs' employment would be terminated. The parties also agreed that the signing of a buy-sell contract "would be a condition precedent to the obligation to purchase the 4% and 2% interests. The stock-purchase contract contained a clause in which the parties promised to use their best efforts to conclude the buy-sell contract."

The buy-sell contract was never signed. The parties had a dispute about how the purchase price would be allocated among the shareholders.

When April 15, 2009 arrived, the negotiations were stalled. Denil and Nardella refused to purchase the 4% and 2% interests in the company. They also failed to put the $750,000 purchase price into an escrow. DeBoer then fired the plaintiffs and they sued, seeking reinstatement, the opportunity to invest in DeBoer and damages for tortious interference.   DeBoer filed a counterclaim.  The case was decided under Wisconsin law.  The district court entered summary judgment on all claims and the case was appealed to the Seventh Circuit, which affirmed in an opinion by Judge Easterbrook.

Plaintiffs contended that DeBoer did not use "best efforts" to conclude the Buy-Sell Agreement.  The Seventh Circuit disagreed.  Neither side violate cdd the best efforts clause because both exchanged many proposals.  As the court stated: "[Plaintiffs] were free to buy the sock, with or without a buy-sell agreement; they just shoe not to do so.  They agreed that they can't complain about the termination of their management positions.  Ronald DeBoer wanted to ensure that the new managers' interests were aligned with those other shareholders.  Plaintiffs were not entitled to retain the positions without making the investment essential to that end."

The Seventh Circuit also rejected the tortious interference with contract claim and the bad faith claim.  "No one interfered with any contract: DeBoer simply enforced the contracts it had negotiated."

There was no lack of good faith because DeBoer did what it was entitled to do under the contract.  As the court noted, "'good faith' in contract law means honesty plus refraining from opportunistic conduct that exploits the other side's sunk costs."  See Market Street Associates L.P. v. Frey, 941 F.2d 588 (7th Cir. 1991).  The court described bad faith - an actor who sulks in his dressing room during a movie production.  The conduct is bad faith because the producer has already invested a great deal of money in the production and cannot afford to start with a new actor.

Because DeBoer complied with the terms of the contract, he did breach.

Edward X. Clinton, Jr.

Read More

Opinion analysis: Attorney’s fees for frivolous claims : SCOTUSblog

Opinion analysis: Attorney’s fees for frivolous claims : SCOTUSblog

Read More

Contract Law - The Seventh Circuit Has Enforced A Software Contract - DIGITECH COMPUTER INC v. TRANS CARE INC - US 7th Circuit

Nos. 10–1525, 10–1652. - DIGITECH COMPUTER INC v. TRANS CARE INC - US 7th Circuit

Trans-Care, an Indiana company in the medical transportation business, licensed dispatch and billing software from Digitech. Unfortunately, the software "did not work as Trans-Care expected, and so Trans-Care attempted to exercise an option to terminate the agreement." Digitech brought a claim for breach of contract. Trans-Care then brought a counterclaim for fraud.

The district court dismissed the fraud claim and found in favor of Digitech on the computer contract claim.

In its initial proposal to Trans-Care, Digitech explained its pricing and included a guarantee. The Court described the guarantee as follows: "This guarantee stated that during the first 90 days, billing would be limited to programming charges; within that period, if Trans–Care was not completely satisfied, it could walk away from the contract without paying any software licensing fees."

The parties then negotiated a written software license. However, the 90 day guarantee was not included in the written software license. The Seventh Circuit summarizes the software licenses as follows:

"The Agreement stated that it was to run for three years starting May 8, 2006. Trans–Care's obligation to make monthly software licensing payments was to begin 90 days after the software was installed. For its part, Digitech could “suspend or terminate” the software products and services in the event that Trans–Care was delinquent in payment for 60 days. The Agreement provided that Digitech could recover attorneys' fees for “collections of any unpaid balances.” Finally, it required notice and the opportunity to cure before termination."

Digitech struggled to install the software. When the software was finally installed in January 2007 it did not work to the satisfaction of Trans-Care and was allegedly "plagued with malfunctions."

On March 1, 2007, Trans-Care attempted to exercise the 90-day right to cancel. Because the provision was not included in the agreement, Digitech refused to honor it.

On April 3, 2007, Digitech locked the software because of Trans-Care's failure to make payment.

The main issue on appeal was whether the 90-day cancellation provision was part of the contract even though it was not included in the final draft of the contract.

The Seventh Circuit agreed that the 90-day cancellation provision is not included in the agreement. Moreover, parol evidence could not be used because there was no evidence the provision was part of the contract. The Court holds: "The negotiations went on for some time, and Digitech's last mention of the 90–day satisfaction guarantee occurred two-and-a-half months prior to the conclusion of the final agreement. Even without a formal integration clause, we would need some clue in the final agreement that the parties meant to carry this important provision forward. There is none."

Trans-Care also argued that the 90-day provision was referenced in its first purchase order under the Agreement and that, therefore, the 90-day provision was included in the Agreement. The Court rejected this argument. It writes: "If one reads the purchase order as Trans–Care does, it is an attempt at a modification of the Agreement. “The modification of a contract, since it is also a contract, requires all the requisite elements of a contract.” Hamlin v. Steward, 622 N.E.2d 535, 539 (Ind.Ct.App.1993). In order for the modification to be effective, Section VI of the Agreement required written evidence that Digitech accepted the new term. No such evidence exists: Digitech did not sign the purchase order or take any other action indicating its acceptance. The purchase order was therefore at most a proposal for a modification that was never accepted, and thus its terms did not become part of the overall agreement between the parties. Trans–Care thus cannot justify its repudiation of the contract on this basis."

The Court affirmed the judgment for Digitech, but reversed most of the damage award on the ground that Digitech locked the software one month after Trans-Care attempted to cancel. Once Digitech terminated the contract by locking the software, it could no longer collect payment. Thus, Digitech was entitled to payment for the period from January 2007 to April 3, 2007 and no more.

The case was decided under Indiana law, which appears to be identical to Illinois law.

Comment: this case is a sad lesson in contract drafting. The parties failed to carefully include the 90-day cancellation provision in the final software license and, thus, they were not able to rely on it. Trans-Care was fortunate that Digitech locked the software and thereby terminated the contract.

Edward X. Clinton, Jr.

Read More

Contract Law - Discovery Rules Applies to Breach of Contract Claim

Newell v. Newell, Ill: Appellate Court, 3rd Dist. 2011 - Google Scholar

This case holds that the discovery rule applies to a breach of contract claim.

Jared Newell filed a lawsuit against his mother Ruth Newell and First Midwest Bancorp alleging conversion and breach of contract alleging that Ruth had improperly withdrawn funds from a savings account in his name.

In 1993, while a minor, Jared received a settlement from a lawsuit involving a motor vehicle accident. A court order entered in the lawsuit provided that: "No funds shall be withdrawn from the minor's account without prior court order."

In 1994, Ruth opened a guardianship account in Jared's name. The signature account contained the following statement: "Minor account. No minor withdraw until 18 years old on 5-18-00 per court order — See Louise McLaren." Ruth's attorney, Thomas Cowgill, gave bank personnel a copy of the court order when Ruth opened the account.

Unfortunately Ruth removed the balance of the account without a court order.

In 2005 or 2006, after graduating from college Jared learned that his mother had drained the account. He filed suit against his mother and the bank in 2007. The bank moved for summary judgment on the ground that the lawsuit was barred by the three-year statute of limitations set forth in the Uniform Commercial Code. (810 ILCS 5/4-111). The trial court agreed and granted the motion for summary judgment.

The Appellate Court reversed and reinstated the case. The court reasoned that the discovery rule applied to the case: "

An action for breach of contract accrues when the breach of the contractual duty or obligation occurs. ABF Capital Corp. v. McLauchlan, 167 F. Supp. 2d 1011 (N.D. Ill. 2001). The discovery rule is an equitable exception that tolls the statute of limitations period until the plaintiff discovers, or has reason to discover, the cause of action. Knox College v. Celotex Corp., 88 Ill. 2d 407 (1981). The rule was created to alleviate the harsh consequences that result from a strict application of a limitations period. Continental Casualty, 329 Ill. App. 3d at 701. It typically applies in cases where the relationship between the injury and the alleged wrongful conduct is obscure. Rodrigue v. Olin Employees Credit Union, 406 F.3d 434 (7th Cir. 2005). Thus, under the discovery rule, the statute of limitations does not begin to run until the plaintiff knew, or in the exercise of reasonable diligence should have known, that he was injured, the cause of his injury, and that there was some indication of wrongdoing. Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325 (2002)."

Jared argued that before 2005 or 2006 he could not have discovered the unauthorized withdrawal because his mother was in a position of trust.

The Court then distinguished several cases where Illinois courts have held that the discovery rule did not apply to UCC or breach of contract claims. The Newell Court noted that other Illinois cases have applied the discovery rule where there were circumstances of fraudulent concealment.

The court reasoned that Jared's mother concealed the unauthorized withdrawals from him and the Bank was in the best position to block the unauthorized withdrawals. "[F]raudulent concealment by a third party tolls the statute of limitations where the person fraudulently concealing the cause of action is in privity or has an agency relationship with the defendant. Serafin v. Seith, 284 Ill. App. 3d 577 (1996). This case involves allegations of fraud committed by Jarred's mother, someone in a position of trust and the guardian of the FMB account. Because Ruth was the guardian of the savings account and Jarred resided with her, account statements were mailed to Ruth. Thus, while the victim of a conversion of negotiable instruments case is typically in the best position to easily and quickly detect the loss and take action (see Haddad's of Illinois, 286 Ill. App. 3d at 1073), it would have been difficult for Jarred to uncover any wrongdoing that may have been apparent in the account records (see Continental Casualty, 329 Ill. App. 3d at 702). In this case, the bank was in a better position than Jarred to enforce the depository agreement and monitor any unauthorized withdrawal of funds."

Comment: this is an area of some debate and uncertainty in the law and one that this blog will attempt to cover in the future.

Edward X. Clinton, Jr.

Read More

Fraudulent Misrepresentation On the Internet is recognized by Illinois

BONHOMME v. St. James, Ill: Appellate Court, 2nd Dist. 2011 - Google Scholar


This is not a commercial case, but the topic is novel and important and could have implications for the commercial world.


The Illinois Appellate Court for the Second District held that the plaintiff, who was duped by a fake persona on the internet, could maintain a cause of action for fraudulent misrepresentation.


Plaintiff alleged that the defendant developed a fake persona to lure the plaintiff to make expensive gifts. Eventually, plaintiff gave the defendant and her friends about $10,000 in gifts and other items. Plaintiff and Defendant began on-line conversations in a chat room for the HBO show Deadwood. The court summarizes the "relationship" as follows: "In June, defendant registered again, posing as a man named Jesse James and under the user name of "Auboy." "Jesse" began chatting with and e-mailing plaintiff in July 2005. Defendant, in her own name, also began e-mailing plaintiff in July. ... Plaintiff and "Jesse" began an on-line romantic relationship that lasted until July 2006."


The Court explained why it believed it was appropriate to expand the law of fraudulent misrepresentation:


It is clear, then, that while the "typical case" of fraudulent misrepresentation arises in a commercial context, our supreme court has acknowledged that this tort may, in the appropriate circumstances, be expanded to cover areas outside of the commercial context. We conclude that this is an appropriate circumstance in which to expand the application of fraudulent misrepresentation. We first note that this case is "one in which the plaintiff has parted with money, or property of value, in reliance upon the defendant's representation" (W. Page Keeton et al., Prosser & Keeton on Torts §105, at 726-27 (5th ed. 1984)), so it is not, all at once, an expansion of the tort into "purely personal settings." See Doe, 228 Ill. 2d at 348. Plaintiff clearly pleaded that she spent over $10,000 on gifts, some of which were for defendant, but some of which were for "Jesse" and other characters invented by defendant, and $700 for preparations for a move to live with "Jesse." Clearly, these are economic losses alleged to have resulted from defendant's misrepresentations. Plaintiff has also alleged other damages, including bills for therapy and medical expenses "to recover from Defendant's false representation regarding the fictitious characters and their activities." However, as this case involves a motion to dismiss during the pretrial stage, we need not address whether such damages could be recovered here.


Looking again to the elements of this cause of action ((1) a false statement of material fact; (2) knowledge or belief of the falsity by the party making it; (3) intention to induce the plaintiff to act; (4) action by the plaintiff in justifiable reliance on the truth of the statement; and (5) damage to the plaintiff resulting from that reliance), we conclude that plaintiff has alleged sufficient specific facts to establish a cause of action for fraudulent misrepresentation. Plaintiff alleged that defendant posed as at least 20 fictional characters between June 2005 and April 2007, the most important of which was "Jesse," with whom plaintiff started "chatting" in the Deadwood chatroom in July 2005. Defendant also communicated with plaintiff in her own name and represented to plaintiff that "Jesse" and the other characters were real persons she knew. Thus began an almost-two-year masquerade of false statements from defendant to plaintiff, statements that defendant obviously knew were untrue. The complaint is filled with specific dates of, and quotes from, e-mails from defendant, "Jesse," and other characters.


Comment: I agree with the Court's decision. The plaintiff was duped by the defendant (who created phony online profiles) to part with her hard earned money. The creation of each of the phony online personalities involved making false statements to Plaintiff. The false statements were designed to convince plaintiff that internet persona "A" was really somebody else.


UPDATE:


Since my original post, the Illinois Supreme Court accepted this case, heard argument, and reversed. The Court held that the trial court properly dismissed the fraudulent misrepresentation claim because the dispute arose out of a personal relationship.  


The citation to the case is 2012 IL 112393.


The court, in an opinion by Justice Thomas, held: 


"In light of Doe [v. Dilling 228 Ill. 2d 324, 343-43 (2008)], the crucial question in this case is whether the facts at issue are purely personal in nature, or whether there exists some commercial, transactional, or regulatory component that moves them beyond the purely personal.  This is not a difficult question to answer.  When all is said and done, what lies beneath this case is two private persons engaged in a long-distance personal relationship...Indeed, all of the hallmarks of ordinary human relationship are present: correspondence, conversation, intimacy, trust, mutual beneficence, emotional support, affection, disappointment and even grief.  And just as importantly, there is absolutely nothing of the commercial, transactional, or regulatory at work...Consequently, as regrettable as the alleged facts are, we hold that they are not the types of facts upon which a claim for fraudulent misrepresentation may be pled."


Edward X. Clinton, Jr.

www.clintonlaw.net

Read More