The Appellate Strategist

The Appellate Strategist

Insights on appellate issues, trial consultations, and evaluating appeals

Illinois Supreme Court Agrees to Decide Fiduciary Duty Claim Against Former Counsel

Posted in Illinois

5716366573_c629bd389e_z(1)In a few weeks’ time over at Appellate Strategist’s sister blog, the Illinois Supreme Court Review, we’ll address the question of just how rare it is to get an unpublished decision – what we in Illinois call a Rule 23 order – accepted for review by the Illinois Supreme Court. As we wrap up our review of the January term, we address a Rule 23 order newly added to the Court’s civil docket – Stevens v. McGuireWoods LLP. Stevens, which arises from Division 4 of the First District, poses a number of related questions regarding issue preclusion in the context of a claim against a law firm.

The plaintiffs in Stevens are former minority shareholders of a corporation. They hired a law firm to bring individual and derivative claims against the corporation’s managers as well as the majority shareholder for misappropriation of trademarks and other intellectual property. The plaintiffs successfully moved to disqualify another law firm from representing the managers in the ongoing litigation.

In the summer of 2008, the trial court dismissed all claims against the managers, and three of nine claims against the owner. The plaintiffs retained new counsel, and later filed two rounds of amended complaints. The second amended complaint purported to state claims “individually and on behalf of” the corporation against the disqualified law firm. The law firm, the managers and the owner/majority shareholder all filed separate motions to dismiss.

The trial court granted the motion to dismiss against the law firm, holding that all counts were time barred. The court nevertheless went on to consider the merits of the claims, holding that the plaintiffs could not bring five of their claims against the firm in an individual capacity, and that plaintiffs had failed to adequately allege derivative claims with respect to several claims. With respect to the claim for conversion, the court held that plaintiff had failed to adequately allege that it had any right to the property at issue, or that the firm had aided or abetted in the alleged conversion. The court therefore dismissed a total of six claims without prejudice. (In other orders, the court dismissed the complaint against the managers in their entirety, and dismissed several counts against the owner/majority shareholder. The case against the owner/majority shareholder was settled a few months later).

In late 2011, the plaintiffs sued their own counsel for breach of fiduciary duty, alleging that counsel had failed to sue the other law firm in a timely manner. According to plaintiffs, the case had been settled for less than it was worth because of the loss of the claims against the opposing law firm.

After limited discovery, the parties filed cross-motions for summary judgment. The law firm defendant argued that the plaintiff’s claims amounted to a collateral attack on the original trial court orders holding that the clients lacked standing to sue the opposing law firm. The trial court granted the defendants’ motion for summary judgment, holding that the plaintiffs’ new claim was barred by collateral estoppel.

The Appellate Court affirmed in part and reversed in part. The court concluded that the lower court in the original action had ruled that any individual claims against the opposing law firm were barred. It didn’t – and indeed, could not have – ruled that derivative claims against the opposing firm were barred. The lower court had dismissed the derivative claims against the opposing firm, but it had done so without prejudice. And besides, the trial court had never dismissed count II for usurpation of corporate opportunities at all. Therefore, although collateral estoppel certainly barred the plaintiffs’ claim against their former counsel with respect to the individual claims, it certainly didn’t with respect to the derivative claims.

The defendant argued that the plaintiffs lacked standing to bring any claim against it arising out of the derivative claims, since the law firm represented the corporation with respect to those claims. The Appellate Court disagreed. The defendant represented the individual plaintiff shareholders, the court found. Just because the law firm advised it to bring derivative as well as individual claims didn’t make the firm the corporation’s attorney.

We expect Stevens to be decided in eight to twelve months.

Image courtesy of Flickr by Mr.TinDC.

Illinois Supreme Court Agrees to Decide When Tender Will Moot Putative Class Claim

Posted in Illinois

3290478769_22af7fdd34_zThe plaintiff files a skeletal class certification motion the same day as his putative class complaint. Subsequently, the defendant tenders a check to the plaintiff representing everything the plaintiff could recover for his action. Is the plaintiff’s class claim moot? That’s the question that the Illinois Supreme Court agreed to decide in the closing days of its January term in Ballard RN Center, Inc. v. Kohll’s Pharmacy and HomeCare, Inc., a decision of the First District, Division 4.

The plaintiff’s complaint alleged that he received an unsolicited fax advertisement from the defendant. The fax purportedly lacked the required “opt out” notice; the plaintiff had no prior relationship with the sender, and had not given general permission for such faxes to be sent. The complaint asserted that the fax sent to plaintiff was part of a mass broadcast of fax advertisements which had been received by at least forty other persons in Illinois. Plaintiff purported to state one claim for violation of the Telephone Consumer Protection Act, one for violation of the Illinois Consumer Fraud Act, and one for conversion.

On the same day that the plaintiff filed its complaint, plaintiff filed a motion seeking certification of three classes. The motion contained no factual allegations justifying certification, and stated that plaintiff would file a memorandum of law “in due course.”

Defendant moved for partial summary judgment on Count I, the TCPA claim, alleging that on three separate occasions, it had made an unconditional tender of a sum covering all damages the plaintiff could possibly recover under the Act. The defendant argued that plaintiff had not filed a sufficient motion for class certification to satisfy the standard of Barber v. American Airlines, and his TCPA claim was therefore moot. The trial court denied the motion for summary judgment, holding that Barber merely requires the filing of some sort of motion for class certification; there are no particular prerequisites for the motion. The court subsequently certified a class, and defendant appealed.

The Appellate Court found that commonality appeared to exist, as there were significant common issues of fact and law pertaining to all class members. The court declined to hold that evidence of consent among class members was sufficient to defeat certification, or that recipients whose faxes were routed straight to a computer, and thus had never printed the blast fax out, might present different issues. The court further found that a class action was appropriate, rejecting the defendants’ view that there was something fundamentally wrong with notifying class members by unsolicited faxes that they were members of a class arising from sending of unsolicited faxes.

Nevertheless, plaintiff’s TCPA claim was moot, the Appellate Court held. Barber held that payment to the class representative doesn’t moot a class claim when the class representative has filed a motion for certification sufficient to bring the interests of the class before the court. Accordingly, the Appellate Court held, a motion sufficient to satisfy Barber had to include sufficient factual allegations to bring the absent class members’ interests before the court. The plaintiff’s motion hadn’t done that, the court found; the plaintiff had merely filed a “shell” motion, and if a shell motion was sufficient to block Barber mootness, then Barber means nothing.

The Appellate Court reversed class certification as to the TCPA claim, but affirmed in all other respects.

We expect Ballard RN to be decided in eight to ten months.

Image courtesy of Flickr by Michelle Kinsey Bruns.

Illinois Supreme Court Debates Anonymity of Internet Poster

Posted in Illinois

2769699053_d359f502bd_zIn the closing days of its January term, the Illinois Supreme Court heard oral argument in Hadley v. Subscriber Doe. Hadley poses the question of whether the defendant is entitled to quash the plaintiff’s subpoena seeking to discover the identity of an anonymous internet poster. Our detailed summary of the underlying facts and lower court orders in Hadley is here.

An anonymous reader posted a defamatory comment about a political candidate at the end of an online newspaper article. The plaintiff sued the poster, using only his online screen-name, and sent the internet service provider a subpoena seeking the poster’s ISP address. The defendant moved to quash the subpoena. At the hearing, the trial court commented that the matter would be better addressed through Supreme Court Rule 224, which is intended to help identify unknown defendants prior to actually filing a complaint. So the plaintiff filed an amended two-count complaint: a defamation claim, and a Rule 224 petition for an order that the poster’s identity and address be disclosed. After a hearing the trial court granted the Rule 224 petition. On reconsideration, the defendant pointed out that the court’s order wasn’t appealable, given that the defamation claim was still pending. The trial court responded by adding Rule 304(a) language.

The majority of the Appellate Court affirmed, holding that the defendant’s screen name was a fictitious name, not a fictitious person, and the filing of the complaint was therefore not a nullity for statute of limitations purposes. The court further held that the trial court’s order was immediately appealable as an ordinary Rule 224 order. Even though the plaintiff had bundled the petition with a claim for defamation which was still pending, the Rule 304(a) language disposed of any doubt as to whether the order was appealable.

Counsel for the defendant began the Supreme Court argument. Counsel began by briefly discussing the timeline, because in defendant’s view, the statute of limitations was central to the case. Justice Freeman asked whether the second action in state court had introduced the Rule 224 issue. Counsel said no. The matter was a routine civil case with litigants Hadley and Doe. The plaintiff had obtained a subpoena to the internet service provider, and the defendant appeared and moved to quash, arguing that the action against the unnamed defendant was void ab initio. The plaintiff then amended what defendant believed was a void complaint, but Rule 224 actions are supposed to be independent actions filed prior to a substantive complaint. The courts have considered an action against a party whose identity is unknown void for more than 100 years. Justice Thomas asked, if the Court found the anonymous poster’s screen name fictitious, what that would do to the argument. Counsel said it would bolster the argument. According to the common law, a fictitiously named party cannot be sued. That’s why we have Rule 224. Justice Thomas asked whether the internet screen name was chosen to preserve anonymity. Counsel said no, the defendant had alleged that he was the same person as the unknown user of the screen name – that was done by the plaintiff only. There are no factual allegations in the plaintiff’s complaint linking the defendant and the screen name. Counsel suggested that the defendant could be one person, a place or an office – the name was a placeholder. Justice Theis asked counsel whether he agreed with earlier case law providing that discovery of the identity of a blogger should be ordered when the allegations can withstand a 2-615 motion. Counsel answered that the standard is intended to balance the interests of the plaintiff and the commentator’s First Amendment rights. Counsel suggested that a more appropriate step would be a Section 2-619 motion or a motion for summary judgment – something extending beyond the four corners of the complaint. Justice Theis suggested that the fundamental issue has not been resolved in Illinois. Counsel agreed, and suggested that at minimum, in the context of a political race, the plaintiff should be required to come up with factual allegations on harm. Justice Theis asked how the plaintiff should proceed in connection with Rule 224. Counsel responded that the plaintiff should file the petition, including specific allegations about how the petition is related to a claim, and how the plaintiff has been damaged. Counsel argued that the case is a SLAPP suit waiting to happen. The only thing a political candidate would have to do to find his or her opponents would be to file a Rule 224 petition and then do nothing. Counsel argued that it was telling that when the plaintiff sought reconsideration, he had asked for the case to be reinstated only long enough for a ruling on the motion to quash. Counsel argued that the plaintiff merely wanted to know the identity of the anonymous website poster – he didn’t actually want to proceed with a defamation claim. Counsel argued that this conclusion was supported by plaintiff’s failure to include a defamation per quod count, which defendant argued was because plaintiff had no damages.

Plaintiff too began his argument by reviewing the procedural history. Plaintiff had filed an amended action, naming the internet service provider, because he had initially failed to learn the identity of the defendant. Counsel argued that the anonymous poster had used a false name, his screen name, and the name “subscriber Doe.” The plaintiff had filed suit against “Subscriber Doe,” using the screen name- which plaintiff argued the defendant had used in Federal court. Plaintiff insisted that it was obvious that Subscriber Doe and the screen name were the same person. The speaker was obviously an actual person, counsel argued. Justice Thomas asked whether the screen name was a fictitious name, a generally known name, or was there a difference. Counsel answered that it was a fictitious name for a real person. Chief Justice Garman asked whether it was essential to plaintiff’s theory that the Court maintain a distinction between a fictitious party and a name. Counsel said yes, one could sue a person by the name that person is using, even if it’s false. The defendant was obviously a real person, plaintiff argued – a non-party can’t file a substantive motion attacking a complaint. Counsel said perhaps Rule 224 needs to be clarified, but if a party is going to file something substantive in an Illinois court, anonymity goes away. Counsel for the defendant had pointed out that the plaintiff won the election, suggesting that he had no damages, but plaintiff’s counsel insisted that had nothing to do with anything. In a defamation per se claim, the only issue was whether the statement was defamatory – which this clearly was – and whether it was published. Justice Thomas asked counsel whether he wanted to respond to counsel’s comment that plaintiff was only concerned with identifying the speaker. Counsel responded that the case wasn’t a fishing expedition. The internet service provider said that the ISP address of the commenter was one person at a private address. At the very least, that meant that Subscriber Doe was a material witness.

Counsel for the defendant concluded the argument with rebuttal, arguing that any number of people could have accessed the relevant IP address. Chief Justice Garman asked why the Court should take steps to protect the identity of someone who hasn’t taken steps to protect his or her own network. Counsel responded that unprotected networks were commonplace. Justice Thomas asked how counsel would know that the plaintiff wasn’t really interested in recovering damages, as opposed to merely identifying the speaker. Counsel suggested that his view was supported by the circumstances; this was a political case in a small town. Justice Thomas asked whether it was more likely that someone accused on the internet of highly improper activities was pursuing the case to preserve his own integrity, as opposed to for the sake of retribution. Counsel argued that taking the story as a whole, and all the comments made, the plaintiff’s reading of the comment as defamatory was untenable. Counsel argued that the defendant and the screen name may be the same entity, or they may not be; counsel represented the defendant only. Justice Theis asked counsel whether he had used both names in a pleading, and counsel said no, he had never suggested that the defendant and the screen name were the same person. Counsel concluded by arguing that it was ridiculous that comments made in an internet chat situation would be construed as assertions of fact.

We expect Hadley to be decided in three to four months.

Image courtesy of Flickr by James Cridland.

Illinois Supreme Court Agrees to Decide Breadth of Misconduct Exception for Unemployment Benefits

Posted in Illinois

13689914_d648feba12_zIn the closing days of its January term, the Illinois Supreme Court agreed to hear a case from Division 5 of the First District, Petrovic v. The Department of Employment Security. Petrovic presents an interesting issue on the merits – exactly what has to be proven to trigger the exception to unemployment compensation for employees terminated for misconduct. But it’s possible the Supreme Court may never reach that issue, because Petrovic presents a preliminary standing issue: the plaintiff’s former employer isn’t challenging the award. The Department, the Director and the Board of Review of the Department are.

The plaintiff was a tower planner for an airline. In 2012, she was terminated for allegedly facilitating a gift and a first class upgrade for a passenger without authorization. When the plaintiff filed a claim for unemployment benefits, her employer filed a letter in response, arguing that she had been terminated for violation of a “reasonable and known policy.” The claims adjudicator denied plaintiff’s request for benefits, finding that she had been dismissed for work-related misconduct. Plaintiff appealed to the Department’s referee. During a telephone hearing, she testified that she did not upgrade the passenger herself, no one had objected to her conduct, and her actions did not meet the definition of misconduct. The referee affirmed the decision that the plaintiff was ineligible, and the Board affirmed as well. But the plaintiff filed a petition for administrative review with the trial court, and the court reversed, holding that there was no evidence of misconduct in the record.

On appeal, the plaintiff challenged the standing of the Department, Director and Board to appeal the trial court’s order. The Appellate Court disagreed, holding that the Department was the guardian of the unemployment insurance fund, and as such, has an interest in disputing questionable claims. The court noted that particularly when cases reach the appellate stage, it will often be cheaper for a claimant’s former employer to simply pay the claim than to continue to litigate.

The court then turned to the issues. The Appellate Court pointed out that under the circumstances, the decision before them for review was the administrative decision, not the trial court’s judgment on the petition for administrative review. The court found that to establish misconduct, three elements must be shown: (1) a deliberate and willful violation of a rule or policy of the employer; (2) the rule was reasonable; and (3) the violation either harmed the employer or was repeated by the employee despite explicit instructions from the employer.

The plaintiff argued that she was unaware of any rule or policy contrary to her conduct. But the Appellate Court held that reasonable rules need not be proven by direct evidence. Rather, a rule or policy can be proven by a “commonsense realization that certain conduct intentionally and substantially disregards an employer’s interests.” The Appellate Court held that plaintiff’s conduct satisfied this standard: the upgrade had potentially cost the airline a significant sum, as well as raising alleged safety concerns. Accordingly, the Appellate Court found that the Board’s determination that plaintiff had been dismissed for misconduct was not clearly erroneous. The Appellate Court reversed the Circuit Court’s order, reinstating the Board’s decision.

We expect Petrovic to be decided in eight to twelve months.

Image courtesy of Flickr by Jen Light.

Illinois Supreme Court Debates Jurisdictional Issues in Child Custody Case

Posted in Illinois

8309080001_26bd5ec4d6_zA Circuit Court has subject matter jurisdiction to enter a child custody order pursuant to the Illinois Constitution. But the Court apparently lacks jurisdiction to proceed pursuant to the Uniform Child Custody Jurisdiction and Enforcement Act (750 ILCS 36/201). If the Circuit Court proceeds anyway, is the resulting order void, voidable, or something else? In other words, where does the subject matter jurisdiction of the Illinois courts come from?

That’s the question that the Illinois Supreme Court debated late last month, hearing oral argument in McCormick v. Robertson, a decision from the Fourth District.

McCormick is a custody battle over the child of a brief relationship between a resident of Illinois and a resident of Missouri. In 2010, the father – the Illinois resident – filed a petition to establish father and child relationship, custody and related matters in the Circuit Court in Illinois. The mother – who lived in Missouri with the child – appeared pro se, and the parties presented a joint parenting agreement. Subsequently, a final judgment of parentage and custody was entered.

Three years later, the father filed a petition in the same court, seeking to terminate the joint parenting agreement and gain sole custody. The mother responded with a petition arguing that under the UCJEA, the Illinois court had never had subject matter jurisdiction, so its order was void (subject matter jurisdiction can’t be waived or conferred by consent). The Illinois court and a Nevada court where the mother had initiated proceedings held a telephone conference call and concluded that under the UCJEA, the Nevada court had subject matter jurisdiction. Subsequently, the 2010 judgment of parentage and custody was vacated as void by the Illinois court, and the father’s petition was dismissed with prejudice.

The Appellate Court reversed. The proposition that the UCJEA deprived the Illinois court of jurisdiction presupposed that statutes could add or subtract from Illinois courts’ subject matter jurisdiction, the court held. But it wasn’t so; Illinois courts’ subject matter jurisdiction flowed from Article VI, Section 9 of the state constitution, which confers jurisdiction in the circuit courts over “all justiciable matters” (with limited exceptions not relevant here). This conclusion flowed directly from the Illinois Supreme Court’s holding in Belleville Toyota, Inc. v. Toyota Motor Sales. Since it was obvious that the child custody dispute was a “justiciable matter,” if the statute couldn’t add to or subtract from the trial court’s jurisdiction, it followed that the Illinois court’s original order wasn’t entered without subject matter jurisdiction, wasn’t void, and therefore couldn’t be collaterally attacked three years after it was entered.

Counsel for the mother began the oral argument before the Supreme Court. Counsel noted that both Nevada and Illinois have asserted jurisdiction over the dispute. The mother was not and never had been a resident, nor was the child. Justice Karmeier asked whether it mattered that at the time the judgment was entered in Illinois no other state had attempted to assume jurisdiction. Counsel said no. Because the child resided in Missouri at the time, that state could have asserted jurisdiction, but Illinois had never had a claim under the statute. Justice Karmeier asked if the UCJEA trumped the state constitution. Counsel answered that the provisions of the statute do trump the constitutional provisions. Justice Thomas asked counsel whether his position was contrary to Belleville Toyota. Counsel responded that Belleville Toyota deals only with constitutional jurisdiction. Counsel argued that courts still find statutory limits on jurisdiction in particular kinds of cases, notwithstanding Belleville Toyota. Even when the court has subject matter jurisdiction, power to render a certain kind of decision is another matter. Justice Thomas asked whether the court would have to overrule Belleville Toyota to find for the mother, and counsel responded no. Justice Thomas asked whether the court would be carving out an exception for certain kinds of cases. Counsel responded that the court would either be carving out an exception, or merely taking a different view of some types of cases. Justice Thomas suggested that Belleville Toyota means that with the exception of administrative actions, this is how Illinois law addresses subject matter jurisdiction. Counsel answered that since that time, there have been decisions defining types of cases outside the strict Belleville Toyota framework. Justice Thomas asked whether a bright line rule would assist the bar. Counsel responded yes. Justice Theis asked counsel to respond to the Appellate Court’s reading of Siegel v. Siegel, which predated Belleville Toyota. Counsel responded that Siegel was published before the UCJEA was enacted, and deals with constitutional jurisdiction, not statutory limitations. Justice Theis suggested that there was a practical issue – the mother could have objected to the original Illinois trial court order, or appealed, and the issues would have been sorted out long before. Counsel was suggesting that the agreed order could be attacked anytime. Counsel responded that if there was no subject matter jurisdiction, there could be no waiver, and the Illinois order could be attacked forever. Justice Theis suggested that if that were so, then there was no finality in the order. Counsel said no, there wasn’t; if the order was void, and the trial court lacked subject matter jurisdiction, the order was subject to collateral attack. Justice Karmeier asked whether there was a possible argument that the Illinois court had jurisdiction, and had it until it conceded jurisdiction in 2013, meaning that the 2010 order was final. Counsel said no, if the trial court lacked jurisdiction, the order can’t be in limbo until somebody actually challenges it. Justice Karmeier asked whether that was right, given that the UCJEA had never been raised to the Illinois court in 2010. Counsel answered that the statute was still applicable at that time. Justice Karmeier asked whether the court would have to overrule Belleville Toyota, or carve out an exception to it. Counsel argued that there are cases carving out certain circumstances in which the Illinois courts should not exercise jurisdiction. The court might have had jurisdiction absent the UCJEA, but the statute applied from the outset.

Counsel for the father followed. Counsel argued that the mother agreed to the order, was questioned in court, had an opportunity to object to jurisdiction, and never did so. Justice Thomas asked if any of that is relevant if the trial court lacked jurisdiction. Counsel explained that he was responding to opposing counsel’s comments. Belleville Toyota is perfectly clear, counsel argued – this is a justiciable matter, the trial court had jurisdiction to rule, right or wrong, and it’s done. Chief Justice Garman asked what implications there would be for states adopting model legislation if the court held that the UCJEA was irrelevant to the jurisdictional issue. Counsel said no, but the UCJEA is a procedural statute, and the defendant had an obligation to raise it. Chief Justice Garman asked whether the father’s theory was that the mother essentially conferred jurisdiction on the Illinois courts by failing to raise the UCJEA. Counsel answered that the mother had thirty days to appeal, or two years to challenge the judgment under Section 2-1401. The Chief Justice again pointed out that counsel appeared to be arguing that the mother’s failure to raise the UCJEA initially was fatal. Counsel said yes, the mother was raising a provision of the statute regarding initial determinations of custody. Justice Thomas asked whether counsel agreed that a bright line rule would be helpful. He observed that the court has a number of cases on jurisdiction pending, so the law didn’t appear to be especially clear. Did counsel agree, or was it simply a matter of following Belleville Toyota? Counsel responded that the issue was clear. Even if there are theoretical exceptions to the rule, nothing in this case justifies adopting an exception to the bright line rule of Belleville Toyota. The mother’s position muddies the bright line of Belleville Toyota, counsel argued. It would cast doubt on long-resolved cases. A party doesn’t wait four years to attack a judgment, counsel argued. The mother argued that the UCJEA was about statutory jurisdiction, but there’s no such thing. Subject matter jurisdiction flows from the Illinois constitution, not the statute.

Counsel for the mother concluded the argument. Counsel explained that the mother had acted now because the father had petitioned to change custody in 2013. The court had ordered the mother to come to Illinois and bring the minor child with her. The UCJEA was set up to determine which state would get custody jurisdiction at certain points. The parties went through the entire statutory process the way it’s supposed to happen, with two judges in two states. So now, the case has two courts which have accepted jurisdiction. Because an interstate jurisdictional problem is involved, counsel argued, the case presents different issues than have existed in many earlier cases. The issue would continue to be defined and redefined by the courts, counsel concluded. A bright line rule would be helpful to practitioners. Counsel concluded by asking the court to affirm the trial court.

We expect McCormick to be decided in three to four months.

Image courtesy of Flickr by Bert Kaufmann.

The Illinois Pension Plaintiffs’ Brief: The Cause of State Underfunding, and The Constitutional Convention Revisited

Posted in Illinois, Pension Reform Litigation

2893860978_89147c5e0b_zAs we’ve written here, here and here, the plaintiffs in the Pension Reform Litigation pending before the Illinois Supreme Court needed to accomplish three things in their Appellees’ Briefs to put themselves in a position to prevail – answer the State’s construction of: (1) the history that led to the Pension Reform Act; (2) the history of the Constitutional Convention of 1970; and (3) rehabilitate Felt v. Board of Trustees of Judges Retirement System.

The Appellees’ Brief on behalf of the plaintiffs in Heaton, RSEA, Harrison and ISEA was filed this afternoon, and they appear to have accomplished all three goals.

The State spends considerable space in their brief arguing that the dilemma in which the State finds itself with respect to funding pensions is the result of the 2008-2009 recession, hoping thereby to fit the facts more neatly within a police powers argument. The plaintiffs answer in detail, arguing that the State’s difficulties are largely the result of the State failing to fund state pensions. As of the Public Employees Pension Laws Commission Report of 1969, the five State pension systems had an aggregate funding rate of only 41.8%. Forty-four years later, in 2013, plaintiffs argue that the same five pension systems had an aggregate funding rate of 41.1%.

Underfunding continued after the Pension Clause was approved, the plaintiffs argue. Between 1982 and 1995, the State’s contributions remained “relatively constant,” with no plan in place to address the funds’ deficits. A funding plan took effect in 1995, but the plan didn’t address unfunded liabilities; according to plaintiffs, it increased them. And even so, the State failed to live up to the plan, lowering its required contribution in 2006 and 2007 by 56 and 45 percent, respectively.

The plaintiffs address the constitutional debates next. Plaintiffs quote Delegate Kinney’s statement that the Clause was intended to ensure that if a police officer is promised a certain pension when he accepts employment, he will actually receive that amount when the time comes for retirement. The plaintiffs also quote Delegate Kemp, who pointed out that even if the depths of the Depression, retirees from the City of Chicago had not had their pensions altered.

The plaintiffs point out that only two weeks after the Pension Protection Clause was approved, the Chair of the Public Employees Pension Laws Commission wrote to Delegate Green, the co-sponsor of the Clause, to complain that the Clause was “inflexible.” The Chair urged the Convention to modify the Clause to expressly recognize the right of the legislature to “enact reasonable modifications” to employees’ contributions, minimum service requirements and other provisions in order to keep the systems fiscally sound. But Delegate Green declined to even present the proposal to the Convention.

The plaintiffs next address the legislative history of the Pension Reform Act of 2013 itself. The plaintiffs argue that the Act reduces pension benefits of retired State employees in at least five ways: by reducing automatic annual increases; by skipping the automatic annual increase in alternate years for certain employees; by capping pensionable salaries; by increasing the retirement age on a sliding scale; and by changing interest rates used to calculate certain benefits. According to the plaintiffs, the chief sponsor of the Act in the state Senate conceded during the legislative debates on the bill that the underfunding issue arose from the State not making its required contributions, and that there were “certainly” other feasible alternatives to the bill: “[M]any other things could have been possible alternatives,” the sponsor said. Plaintiffs argue that the chief sponsor also “would not agree that Senate Bill 1 was the least restrictive means available” to address the problem.

According to the plaintiffs, the State’s argument fails on the simplest grounds imaginable: it is contrary to the plain language of the Pension Protection Clause itself. According to the plaintiffs, the State argues that since the Clause fails to exempt itself from the police power, it is subject to an implicit limitation. But the law is directly to the contrary, the plaintiffs argue; no limitations can be read into the Clause which aren’t found there.

The State attempts to read the word “diminished” out of the Clause, plaintiffs insist. The State argues that “diminished” and “impaired” mean the same thing in the Clause. But basic rules of construction bar any reading of the Clause which makes any word superfluous. Indeed, plaintiffs claim, it’s even clearer than that – Delegate Kinney expressly said the “diminished” and “Impaired” meant different things.

Nor can the State’s position be reconciled with the Convention debates, the plaintiffs argue. As we discussed at length here, the plaintiffs point out that the Convention sponsors intended the Clause, to a considerable degree, as a response to Spina v. Consolidated Police & Firemen’s Pension Fund Commission (1964), a decision of the New Jersey Supreme Court which authorized benefit cuts in order to maintain pension funds’ financial viability. Plaintiffs argue that the co-sponsors intended the Clause as an indirect spur to encourage governments to fully fund the pension plans, thus averting a Spina-style underfunding crisis brought on by failing to pay liabilities as they are incurred.

The plaintiffs then turn to the case law interpreting the Pension Protection Clause. According to the plaintiffs, the Supreme Court in Felt squarely held that an amendment to the Pension Code modifying a benefits formula and thereby reducing pension annuities was unconstitutional per se. The State has argued that the Supreme Court in Felt held that there was an implied police power exception to the clause, but in fact the Court held nothing of the kind, according to the plaintiffs. The language emphasized by the State merely finds even if there were a police powers exception, the State’s claim would still fail. The Court never addressed the issue of whether any such exception existed. According to the plaintiffs, “no Illinois court” since the 1970 Constitution “has held any amendment to the Pension Code constitutional” based on the State’s police power argument.

In an earlier post, we suggested that the State’s argument could be caricatured as “the State cannot cut pension benefits – unless it really needs to.” And that’s the problem, the plaintiffs argue; the Supreme Court has repeatedly held that the General Assembly cannot enact legislation which conflicts with specific provisions of the Constitution, notwithstanding any emergency circumstances.

The plaintiffs next turn to the State’s claim that if the Pension Protection Clause is intended to be absolute in its protection of pension benefits, then the Clause violates the federal constitutional principle that states cannot bargain away part of its police powers. Plaintiffs argue that the State fundamentally misunderstands the federal reserved powers doctrine. The doctrine merely holds that states can’t surrender a sovereign power pursuant to contract, the plaintiffs argue. It offers no barrier to a State’s purely financial obligations, or constitutional limitations on the State’s power. Indeed, the plaintiffs argue, Illinois courts have recognized that financial obligations are not the same thing as police powers.

The plaintiffs conclude by addressing the question of whether the Act is severable. The Act has a severability clause, plaintiffs concede, but the Court has never considered such clauses conclusive. Notwithstanding such a clause, if important elements of a broad legislative package intended to fundamentally reform a subject area are eliminated so that the remaining portions of the statute do not resemble what the legislature enacted, the court will strike down the statute in its entirety, even in the face of a severability clause. The legislature wouldn’t have enacted the Act without the various provisions cutting benefits, the plaintiff argues; and that’s enough to doom the entire statute.

The State’s reply brief is due in ten days, on February 27. The Supreme Court has announced that the Pension Reform Litigation will be argued in a rare afternoon session at 2:30 p.m. on March 11, 2015.

Image courtesy of Flickr by Anne Swoboda.

Do You Have to Disclose a Personal Injury Claim in a Bankruptcy Proceeding?

Posted in Illinois

11096611573_afe1470cc0_zCan a personal injury claim be barred by judicial estoppel if you fail to disclose the unliquidated claim in your personal bankruptcy proceeding? That’s the question the Illinois Supreme Court agreed to decide late in its January term in Seymour v. Collins, a case from the Second District.

In April 2008, plaintiffs filed a petition for bankruptcy. The following year, husband was injured at work. Plaintiffs moved to modify their Chapter 13 bankruptcy plan because husband was unable to work and was receiving workers compensation payments. The following year, husband was injured at work once again, and then injured a second time while being transported in an ambulance. He then filed a tort suit for the injuries arising out of the ambulance accident.

In July 2012, plaintiffs were granted a discharge in bankruptcy. Defendants then moved for summary judgment in the tort suit arising out of the ambulance accident, arguing that plaintiffs were judicially estopped from proceeding with their claim, since they had never disclosed their claim in the bankruptcy proceeding. The trial court granted the motion.

The Appellate Court affirmed. The five elements of judicial estoppel, the court found, were that a party (1) took two positions; (2) which were factually inconsistent; (3) in separate judicial proceedings; (4) intending for the trier of fact to accept the truth of the facts alleged; and (5) the plaintiff succeeded in the first proceeding, receiving some benefit from the position taken.

The court held that plaintiff satisfied the first element by failing to disclose their unliquidated personal injury claim. Although the bankruptcy forms didn’t affirmatively require the disclosure of such claims, the bankruptcy estate encompassed all property, including legal claims, acquired after the petition is filed but before the case is closed. Debtors have a continuing duty to disclose all assets acquired while the case remained open.

Further, plaintiffs received some benefit by failing to disclose their claim, since they avoided the possibility of creditors objecting to or seeking modification of their plan. They also received a discharge of their debts without disclosing the existence of their personal injury claims.

The majority acknowledged that some courts have held that a statement under oath is necessary for the doctrine to apply, but the court disagreed. The element was more properly expressed as an intent for the court to accept the truth of the facts asserted in support of the petition, the court found. That element was satisfied on the evidence, noting that the plaintiffs had disclosed the husband’s first workers’ compensation case in the course of seeking a reduction in their payments.

Justice Schostok dissented, arguing that a statement under oath was needed for judicial estoppel to apply, and that the evidence showed that the non-disclosure in the case was unintentional.

We expect Seymour to be decided in eight to twelve months.

Image courtesy of Flickr by Steve Lyon.

Illinois Supreme Court Debates Intersection of Party Diligence and Motions to Vacate

Posted in Illinois

5107355908_1dd9e14a44_zSection 2-1401 of the Illinois Code of Civil Procedure (735 ILCS 5/2-1401) provides that a judgment may be set aside more than thirty days after its entry on petition for various reasons. So when is the apparent lack of diligence of the party seeking to set aside the judgment sufficient grounds for denying the petition? That’s the question presented in Warren County Soil & Water Conservation District v. Walters, which the Illinois Supreme Court heard oral argument on in the final week of its January term. Our detailed summary of the underlying facts and lower court judgments in Warren County is here.

The plaintiff sued the defendants for removing approximately 54 trees from its property, purporting to state claims for trespass, conversion, quantum meruit, negligence and one for violation of the Wrongful Tree Cutting Act. The defendants’ retained counsel failed to file an answer, either at the deadline, or when the Court ordered him to file a month later. The plaintiff moved for a default judgment, and counsel still failed to appear, so default was entered. A month later, the defendant’s counsel moved to set aside the default, but never noticed the motion for hearing. When plaintiff’s counsel noticed the motion for hearing, the defense counsel didn’t show up for the hearing. So the trial court denied the motion. Ten months later, the plaintiff’s counsel filed a citation to discover assets, and a week later, the court removed defense counsel and directed the defendants to retain a new lawyer. The new attorney filed a second motion to set aside the judgment, along with an affidavit from the defendant stating that the client was unaware of the default. The trial court denied the second motion to set aside, and the Appellate Court affirmed, with Justice William E. Holdridge dissenting.

Counsel for the appellant began the argument. Counsel argued that there were three issues before the Court: (1) did Section 2-1401 allow the Circuit Courts discretion to vacate unjust judgments under their equitable powers; (2) if so, what was the standard of review; and (3) applying that standard. Counsel suggested that the plain language of Section 2-1401 preserves all forms of relief which existed before the statute was enacted. What the defendant sought – discretionary relief on equitable grounds – had existed as a permissible form of relief for 148 years. Counsel suggested that People v. Vincent notes the common law roots of the statute, but went on to say that the view that abuse of discretion applied was based on the erroneous belief that Section 2-1401 invoked the equitable powers of the court. But, counsel argued, that statement is contrary to the statute’s plain language, preserving preexisting remedies. Chief Justice Garman asked if the Court should overrule Vincent. Counsel said no, the relevant language is for the most part dicta. The Court needs to revisit and revise that dicta to make it clear that courts still have some discretion here. Justice Thomas asked whether, if the Court agrees, it should remand for an assessment of the defendant’s diligence. Counsel said no, the trial court had already found that if it had discretion, it would have vacated the judgment in the interests of justice. Justice Theis pointed out that the issues of whether a defendant has a meritorious defense and exercised due diligence were judicial gloss which had been added to the statute. Did counsel have a sense of when those ideas evolved? Counsel answered that they had evolved around the Civil War. Justice Theis asked whether there was a framework for trial courts to use in exercising their equitable authority. Counsel said yes, there was both a remedy and standards to apply in using that power. Justice Theis suggested that Section 2-1401 was actually based on the proposition that a judgment was void. Should that impact the analysis? Counsel said that the elements of due diligence and a good defense still applied. Justice Thomas wondered whether the trial court had ever really considered whether it should relax the standard for due diligence. Counsel disagreed. The trial court had said that if it had the power to relax the standard of due diligence, it would, because it was difficult to think of a more unjust situation. Justice Thomas asked whether it would nevertheless make sense, if the Court held that the due diligence standard could be relaxed, to remand. Counsel answered that the Court could do that, but the trial court had already made its inclinations clear. Justice Thomas asked whether opposing counsel could test the issue, and counsel said factually, it had already been tested. There might be more briefing on remand, but plaintiff hadn’t briefed the issue of due diligence the first time around. If the Court agreed that Vincent should be revisited, then the question became whether the defendant met those standards. The defendants researched the ownership of the property, and every deed they found suggested that a certain person owned the property. They got a contract with the apparent owner, and logged the property. There was no showing below that plaintiff owned the property, counsel argued; the only documents available suggest that the party defendants dealt with owned it. Chief Justice Garman asked how the defendants’ failure to keep track of the case impacts the analysis. Counsel responded that although the defendants didn’t keep track of events when they had their initial attorney, they did when they didn’t have an attorney. If the judgment as inequitable, the negligence of their attorney shouldn’t be attributed to them.

Counsel for the plaintiff followed, arguing that Vincent is clear. The case spells out five scenarios in which Section 2-1401 can apply. Justice Thomas asked whether Vincent even contemplated the current situation. Counsel answered that it addressed several different situations, including the issue of due diligence. Justice Thomas asked counsel to address defendants’ argument that Section 2-1401 preserves common law remedies. Counsel answered that Vincent plainly states there is no judicial discretion to relax the standards. Justice Thomas asked whether counsel was saying Vincent would have to be overruled for him not to prevail, and counsel said yes. Justice Thomas asked whether the allegation that plaintiff stands to receive a windfall plays any role, and counsel said no, the only real issue is whether the standard in Vincent applies. Justice Thomas asked whether, if the Court disagrees re Vincent, the matter should be remanded to the trial court to determine whether it should exercise discretion. Counsel said yes, the trial court suggested that it would relax due diligence, but only in dicta. Justice Thomas asked whether plaintiff would want more to say about diligence, and counsel said he would. Plaintiff disagrees about ownership of the property, and would offer testimony to that issue. Justice Theis asked about the argument that two different standards of review apply for meritorious defense and due diligence. Counsel answered that such a standard would be impossible for practitioners to follow. The Chief Justice asked whether it was accurate to say that to get a more forgiving standard under Vincent, one should seek an evidentiary hearing. Counsel said yes. The Chief Justice suggested that was putting the decision as to how this turns out in the hands of the petitioner. Counsel said yes and no. To a certain extent it does; there may be some cases where due diligence and a good defense could be established on affidavits, and those could be granted without a hearing. Vincent was about summary judgments – it left the evidentiary issue for another day. Since there was no evidentiary hearing here, the plaintiff argued that it was just asking for Vincent to be reaffirmed, and for the Court to make it clear that defendants lacked due diligence as a matter of law.

Counsel for the defendant began rebuttal by reading from the trial court’s order, noting that it was bound by earlier decisions. The lower court made it clear that if it had the ability to exercise discretion, it would have set aside the judgment. The finding that the defendant had a meritorious defense was not dicta, according to the defendant’s counsel; the court said defendant had made a showing that someone else appeared to own the property. Justice Thomas asked the defendant to address the plaintiff’s argument that plaintiff would have more to say about due diligence in the event of remand. Counsel answered that the issue had been addressed below. Justice Thomas asked whether it would be a reason to relax the due diligence standard if there was a windfall here (because plaintiff didn’t actually own the property). Counsel agreed. Justice Thomas pointed out that plaintiff challenged that assertion, and wasn’t that a fact question? Counsel said no, the trial court had found no evidence to back up the plaintiff’s claim to own the property. Justice Thomas suggested that plaintiff believed it didn’t need to provide that evidence because of Vincent. Counsel answered that the 2-1401 proceeding was an entirely new proceeding, and any admissions in the default were merely evidentiary, not conclusive. The plaintiff’s claim to own the property was clearly contradicted by the defendants’ affidavits. In addition to the proposition that plaintiff never owned the property, defendants had the additional defense of bona fide purchaser. Counsel argued that the defendants had investigated, and everything they found supported the view that the party they were dealing with owned the property. The delay of the first defense counsel was a bit of a red herring, counsel argued. The plaintiff had gotten a default judgment and had sat on it, and that’s relevant to the equitable balancing. Counsel concluded by arguing that all notices on the case had gone to the original lawyer for the defendant; the clients believed that their status as bona fide purchasers was an absolute defense.

We expect Warren County to be decided in three to four months.

Image courtesy of Flickr by William Warby.