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.

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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.

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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.

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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.

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

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

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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.

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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.

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