Source: http://paulporvaznik.com/tag/law-of-the-case
Timestamp: 2019-04-23 00:03:57+00:00

Document:
Maurice Sporting Goods, Inc. v. BB Holdings, Inc., 2017 WL 2692124, ponders the reach of the promissory fraud rule (a broken promise normally doesn’t equal fraud), how to plead around it, and the law of the case doctrine.
After a multi-year business relationship for the sale of sporting goods imploded, the plaintiff distributor sued the defendant manufacturer for breach of a 2015 buy-back agreement that required the manufacturer to “buy back” unsold inventory.
The manufacturer counterclaimed; it claimed the distributor defrauded it and tampered with the manufacturer’s relationship with a key customer. Partially granting the plaintiff’s motion to dismiss the counterclaims, the Northern District discussed the factual specificity required of a plaintiff to circumvent the general rule that promissory fraud isn’t actionable.
The Court first addressed the distributor’s law of the case argument – the manufacturer was trying to relitigate its earlier failed estoppel defense (that the distributor’s fraud barred it from recovering damages from the manufacturer). The court previously nixed the manufacturer’s estoppel defense because it failed to link the plaintiff’s fraud to the buy-back agreement.
The law of the case doctrine (LOC) prevents a court from reopening issues it previously decided in the same case. LOC is a flexible doctrine, though. A court will refuse to apply LOC if there is a change in the law, new evidence or compelling circumstances.
The court declined to apply the LOC doctrine here because the manufacturer’s stricken estoppel defense was premised on fraud by the plaintiff distributor related to a separate transaction – the original distributor agreement – that differed from the buy-back agreement that underlay plaintiff’s suit.
Next, the court examined whether defendant sufficiently alleged an exception to promissory fraud under Federal pleading rules. Rule 9(b) of the Federal Rules of Civil Procedure requires heightened factual specificity in fraud claims as the Rule tries to discourage litigants from bootstrapping simple breach of contract claims into tort actions with wide-ranging damages.
Promissory fraud is a false representation of intent concerning future conduct where there is no actual intent to do so. While promissory fraud is generally not actionable, a plaintiff can plead around it by alleging egregious conduct or a pattern of deception or enticements that reasonably induce reliance. A fraudulent scheme exists where a party alleges a specific and objective pattern of deception including the who, what, where, and when of the misstatements.
Here, the manufacturer was able to point to three different agents of the distributor who made misstatements in three different phone calls in the same month to support the fraud counterclaim. These allegations that three distributor employees made false promises in order to sabotage defendant’s relationship with a major retailer were definite enough to meet Rule 9’s pleading requirements for fraud.
While there is some elemental overlap between an estoppel defense and a promissory fraud counterclaim, the defeat of one won’t always cancel out the other where they relate to different transactions and different underlying facts.
To allege actionable fraud based on a broken promise, a plaintiff must plead a scheme to defraud that equates to a measurable pattern of deception or factual misrepresentations.
The bitter breakup of a medical practice provides the setting for the Illinois Fifth District to consider the scope of a non-compete clause and how it impacts a minority shareholder’s buy-out rights.
Gingrich v. Midkiff, 2014 IL App (5th) 120332-U presents a dispute between two former partners in a medical corporation. At the medical practice’s inception – in the late 1990s – the parties signed a stock purchase agreement that contained a 5-year/20-mile non-compete provision (the “Non-Compete”).
The Non-Compete only applied in two situations: (1) if a shareholder withdrew from the practice after giving the required written notice; or (2) where a shareholder was expelled from the practice. The parties’ relationship quickly soured and in 2002, a decade-long cycle of litigation between the two doctors ensued.
A 2002 lawsuit between the parties culminated in the plaintiff buying defendant’s stock in the medical corporation. The court in the 2002 case didn’t rule on whether the Non-Compete was enforceable.
In the 2007 case, plaintiff sued defendant alleging the defendant violated the Non-Compete by going to work for a rival practice within 20 miles of plaintiff’s office.
The trial court dismissed. It held that the Non-Compete didn’t apply because defendant didn’t withdraw and wasn’t expelled from the medical corporation. Plaintiff appealed.
The court rejected plaintiff’s law of the case (LOTC) argument. The LOTC doctrine prevents relitigation of an issue of fact or law previously decided in the same case. ¶ 14. Its purpose is to avoid repetitive litigation of the same issues and to foster finality and consistency in litigation. LOTC reflects the court’s preference to generally not reopen previously decided issues.
Here, there was no adjudication of the Non-Compete in the 2002 case. The core issue litigated in that first suit was the valuation of defendant’s shares and whether plaintiff served a proper election to purchase those shares.
Since the cardinal issues in the 2002 and 2007 Lawsuits substantively differed, LOTC didn’t prevent defendant from challenging the Non-Compete in the 2007 case. ¶¶ 17-19.
The court also found the Non-Compete wasn’t enforceable. In Illinois, noncompetition clauses in the medical services context are heavily scrutinized and only validated where they have reasonable time and space limits.
Finding the Non-Compete unambiguous, the Court held that the 5 year/20-mile strictures attached in only two circumstances: where a shareholder either (1) withdrew or (2) was expelled from the practice. Here, defendant didn’t withdraw and she wasn’t expelled. As a result, the Non-Compete didn’t prevent the defendant from practicing within twenty miles of plaintiff’s office. ¶¶ 25-29.
Afterwords: Clarity in contract drafting is critical. The case illustrates that a Court won’t strain to find ambiguity where contract language is facially clear. Gingrich also illustrates that a restrictive covenant will be construed in favor of permitting, instead of stifling, competition. In hindsight, the plaintiff should have made it clear that if a shareholder departed the medical practice for any reason: whether voluntary, forced, or after a buy-out, the non-compete would still govern.
In Kasinecz v. Duffy, 2013 IL App (2d) 121329-U, an August 2013 Second District case, a contractor suffered a three-pronged defeat in his lawsuit against a homeowner. The Court affirmed the lower court’s bench trial judgment for the homeowner on the contractor’s breach of contract, mechanics’ lien and quantum meruit claims.
Facts: This is the second appeal involving the parties. In 2004, defendant hired plaintiff to build a house pursuant to a verbal agreement which was later formalized in a written contract. The contract required the plaintiff to submit invoices to defendant before defendant was obligated to pay plaintiff. Kasinecz, ¶ 20. Over several months, the plaintiff and his crew built part of the house until a payment dispute arose. Plaintiff walked off the job and sued for breach of contract, mechanics lien foreclosure and quantum meruit. The trial court entered a directed finding for the homeowner half-way through the first bench trial (because the contractor materially breached by failing to furnish a statutory lien waiver, among other reasons) and plaintiff appealed.
In the first appeal, the Second District reversed on the ground that it was unclear whether defendant homeowner requested a sworn statement and because the factual record was too scant to uphold judgment in total for the defendant. Kasinecz, ¶ 6. On remand, the trial court received additional witness testimony and written submissions and again entered judgment for defendant. This time, the Second District affirmed.
Reasoning: The Court sided with the homeowner on all three of the contractor’s claims.
(1) Breach of Contract: the contractor materially breached (and therefore, couldn’t prove that he performed) the contract by not providing invoices to the defendant as required by the contract. Kasinecz, ¶¶ 21-23. The contractor admitted at trial that he didn’t supply invoices until after he walked off the job. Since the contractor breached, he couldn’t prevail on his breach of contract claim.
(2) Mechanics’ Lien claim: The contractor lost his lien claim because he didn’t substantially perform. A necessary condition to mechanics lien recovery is substantial completion of the contract. Id., ¶ 25; Fieldcrest Builders, Inc. v. Antonucci, 311 Ill.App.3d 597 (1999)(note: Fieldcrest provides a thorough discussion of substantial completion/quantum meruit issues in the context of a construction case). Here, the Court found there were holes in the roof, no windows or doors were installed, and the house lacked interior mechanical systems and finishes. Id., ¶¶ 25-26. Because the house was so incomplete when plaintiff and crew stopped work, plaintiff couldn’t show substantial performance. This doomed his mechanics’ lien count. Id., ¶ 25.
(3) Quantum meruit – the Court also rejected plaintiff’s quantum meruit claim based on the black-letter principle that quantum meruit recovery won’t apply where an express contract governs the parties’ relationship. Kasinecz, ¶ 29; Installco Inc. v. Whiting Corp., 336 Ill.App.3d 776 (2002). Since plaintiff and defendant had a written (express) contract for plaintiff to build defendant’s house, this defeated plaintiff’s quantum meruit count. The fact that plaintiff couldn’t enforce the contract (since he breached it) doesn’t matter: the contract’s existence alone defeats the quantum meruit claim. Kasinecz, ¶ 29.
Law of the Case. The plaintiff contractor argued that the Second District’s reversal in his favor on the first appeal was law of the case to the trial court on remand and even moved for summary judgment immediately upon remand. Id., ¶¶ 7, 14-15. The law of the case doctrine provides that questions of law actually determined in a prior appeal are binding on the trial court on remand as well as on subsequent appeals. Id., Kreutzer v. Illinois Commerce Comm’n, 2012 IL App (2d) 110619. Both the trial and appeals court found that the law of the case rule didn’t apply because the issues decided in the first appeal (whether the parties had an oral contract and whether the contractor provided statutory lien waivers) differed from the second appeal’s salient issues (whether plaintiff submitted invoices to defendant and whether plaintiff substantially performed). Kasinecz, at ¶¶ 15, 20.
Take-aways: A material breach will preclude contractual recovery; a contractor’s failure to substantially perform will doom a mechanics’ lien suit; and quantum meruit and a breach of express contract claim are mutually repugnant: they can’t co-exist. The Court did appear to express surprise that the contractor didn’t argue that the homeowner waived strict compliance with the contract’s invoicing requirement. The defendant made several progress payments to the plaintiff without first receiving invoices. This would seem to give rise to a waiver of strict compliance argument. However, since the contractor never argued waiver, the Court didn’t tip its hand as to how it would rule on the issue.

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