Breach of Contract

District Court Underscores the Importance of Suing the Correct Party in Action for Recovery of Distributional Interest

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In FW Associates LLC v. WM Associates LLC, 2019 WL 354953 (No. 18 C 5081) (N.D. Ill. Jan. 28, 2019), the United States District Court for the Northern District of Illinois held that a dissociated LLC member may not sue another member to recover his distributional share in a company, but that the appropriate party for such a suit is the LLC itself.  The court also dismissed the member’s conversion claim for his distributional interest because that interest was “intangible” and thus could not be converted.

This case arose out of a dispute between the owners of Smart Bar, a company that produces an automated cocktail dispenser known as the Smartender.  In 2012, William Metropulos and FW Associates, LLC (“FWA”) formed Smart Bar, USA, LLC and Smart Bar International, LLC (together, Smart Bar).  Before long, the parties began to experience friction in their relationship and, by 2013, found themselves in arbitration amid reciprocal claims of breach of the Smart Bar operating agreement and various acts of misconduct.  In April 2015, the arbitrator ordered Metropulos dissociated from Smart Bar and required him to pay several hundred thousand dollars in attorneys’ fees and expenses to FWA and Smart Bar.  The Circuit Court of Cook County confirmed the arbitrator’s award, and the Illinois Appellate Court affirmed.

Metropulos alleged that Smart Bar dissociated him on November 21, 2016.  This normally would mean that he was still entitled to receive distributions from the entities, but could no longer participate in management of them.  However, according to Metropulos, Smart Bar effectively extinguished his rights entirely by also purporting to take away his distributional interest in the company.  In addition, Metropulos had already transferred his interest in Smart Bar to WM Associates, a new entity Metropulos established after he was dissociated.

In 2018, FWA brought suit against Metropulos and WM (collectively “Defendants”), claiming that Metropulos had wrongfully transferred his interest in the Smart Bar entities to WM in an effort to avoid paying the arbitration judgment.  Defendants brought two counterclaims.  The first asserted that FWA had violated section 35-60 the Illinois Limited Liability Company Act (the “LLC Act”), by failing to buy out Metropulos’ distributional interest in Smart Bar upon his dissociation.  In addition, Defendants claimed that FWA had engaged in other conduct warranting their dissociation from the company.

FWA argued that Defendants’ counterclaims should be dismissed because FWA was not the proper party for Metropulos to sue to obtain recovery of his distributional interest. Instead, Defendants should have sued Smart Bar itself.  The court agreed, rejecting Defendants’ three arguments to the contrary.

First, Defendants claimed that section 15-20(a) of the LLC Act permitted a “member [of an LLC] to maintain an action against….another member” (emphasis added) to enforce its rights under the Act.  But the court pointed out that this provision no longer applied to Metropulos because he had ceased to be a member of Smart Bar upon his dissociation in 2016.  (See section 35-55(a)(1) of the LLC Act:  “Upon a member’s dissociation from the LLC, he ceases to be a member and is treated as a transferee.”)

Second, Defendants contended that, because they were seeking to dissolve Smart Bar due to FWA’s harmful or oppressive conduct, section 35-1(b) of the LLC Act gave the court power to provide relief other than dissolution, “including….a buyout of the applicant’s membership interest.”  Again, however, Defendants had to bring their claims against Smart Bar, not FWA, the member.  In fact, the court suggested that Smart Bar was a necessary party to Defendants’ action, because it had a present, substantial interest in the matter being litigated, which was its own potential dissolution.

Third, Defendants asserted that suing FWA was essentially the same as suing Smart Bar because FWA, as the purported 100% owner of the company, was Smart Bar’s “alter ego.” The court rejected this assertion because an “alter ego” exists between an owner and a company only if (1) there is a unity of interest and ownership that is so strong that the separate personalities of the corporation and the owner “no longer exist,” or (2) treating the company and owner as separate entities would promote injustice or inequity.  However, defendants failed to allege such circumstances.

In their second counterclaim, Defendants sought to have FWA dissociated from Smart Bar based upon various acts of oppressive or illegal conduct FWA allegedly perpetrated upon Metropulos, including attempting to take away his distributional interest in Smart Bar and moving the company’s headquarters to Nevada without legal authority to do so. Defendants asked the court to find that WM Associates was the owner of Metropulos’s distributional interest in Smart Bar or, alternatively, to award defendants damages for FWA’s conversion of that interest.

The court denied Defendants’ request to have WM declared the owner of Metropulos’s distributional interest, reiterating that FWA was not the proper entity to sue for such relief.  With regard to conversion, the court held that Illinois law does not recognize conversion claims based upon “intangible rights.”  Here, the distributional share allegedly converted by FWA was merely an intangible right of future payment, rather than a tangible or intangible thing that could be converted.  Accordingly, Defendants’ claim for conversion had to be dismissed as well.

FW Associates LLC v. WM Associates LLC makes it clear that any former LLC member seeking to recover his or her distributional interest must name the LLC itself as a party, not a fellow member and that a conversion claim may not be used a vehicle for recovery.

Dismissal of Duplicative Matters: Breaches of Contract and Fee Petitions

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Clarice G. Schmidt (“Schmidt”) filed a breach-of-contract claim against attorneys Audrey L. Gaynor and Richard D. Felice and the law firm Audrey L. Gaynor & Associates, P.C. (the “Defendants”).  She accused them of overbilling for their services during her ongoing divorce.  The Defendants moved to dismiss the breach-of-contract claim as duplicative under 735 ILCS 5/2-619(a)(3), since they had already filed fee petitions in Schmidt’s divorce case in order to address the legitimacy of their bills.  The trial court granted the motion and Schmidt appealed.

The Second District affirmed. Dismissal of a redundant matter under section 2-619(a)(3) requires two issues pending “between the same parties for the same cause.”  Id. at ¶9. The parties here were plainly identical. As for the causes of action, they are considered the same if they arise “out of the same transaction or occurrence” such that there is a “substantial similarity.”  Id.  The court noted that substantial similarity did not require “the legal theory, issues, burden of proof or relief sought” to be materially identical.

Here, the only allegations set forth in Schmidt’s breach-of-contract complaint were that the Defendants breached their attorney-client agreements by charging excessive fees. The Second District therefore concluded that the matters were the same, surmising that Schmidt “merely seeks to have a separate court perform another analysis as to the reasonableness and necessity of those same fees.”  Id. ¶12.  Schmidt asserted that her breach-of-contract claim was actually a legal-malpractice claim, but this argument was rejected.  “We are at a loss,” the court declared, “as to how plaintiff’s breach-of-contract suit transformed into one for legal malpractice, when she did not allege any of the elements of legal malpractice.”  Id. at ¶14.  Moreover, Schmidt tacitly acknowledged that she could obtain disgorgement in the divorce/fee-petition litigation because she included her breach-of-contract complaint as an affirmative matter therein.

Schmidt v. Gaynor, 2019 IL App (2d) 180426

(This is for informational purposes and is not legal advice.)

Soverain Software, LLC v. Day, 2017 IL App (1st) 161913-U, appeal denied sub nom. Soverain Software, LLC v. Jones Day, 98 N.E.3d 58 (Ill. 2018)

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This unpublished opinion related to a suit between a former client and a law firm principally centered on past due fees.  The law firm brought a breach of contract claim for $10 million for past due fees and the client counterclaimed for a number of things, including breach of contract and legal malpractice.  The parties arbitrated the dispute and the arbitrator found in favor of the law firm for $1.5 million.  The trial court vacated the arbitration awarded finding that the arbitration panel exceeded its authority and created a compromise award.  The appellate court reversed and affirmed the arbitral award, finding that the award was grounded in the parties’ contract and the trial court improperly imposed its view in place of the arbitral award.

Soverain Software, LLC v. Day, 2017 IL App (1st) 161913-U

(This is for informational purposes and is not legal advice.)

Hill v. Simmons

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In this unpublished opinion, the First District held that a complaint against a lawyer was properly dismissed as time-barred.   The court held that the plaintiff’s claims for fraud, aiding and abetting fraud, breach of fiduciary duty and conspiracy were properly subject to the two year attorney statute of limitations, and that the statute began to run when the plaintiff learned of the lawyer’s alleged misrepresentations.

Hill v. Simmons, 2017 IL App (1st) 160577-U

(This is for informational purposes and is not legal advice.)

Recent Illinois Case: First American Title Insurance Co. v. Dundee Reger LLC v. Hallam

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The Northern District of Illinois addressed third-party claims against a law firm asserting legal malpractice and, in the alternative, breach of contract and promissory estoppel.  The third-party defendant moved to dismiss the breach of contract and promissory estoppel claims as duplicative of the legal malpractice claim.  The court held that, under Illinois law, duplicative breach of fiduciary duty claims should be dismissed but breach of contract claims, even if duplicative, may be plead in the alternative.  The motion to dismiss was denied.

(This is for informational purposes and is not legal advice.)

First American Title Insurance Co. v. Dundee Reger, LLC et al. v. Peter G. Hallam, 2016 WL 1359374

Recent Illinois Case: Navar v. Tribler, Orpett and Meyer, P.C.

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In this unpublished opinion, the Appellate Court affirmed the dismissal of three claims against lawyers. A breach of contract claim was properly dismissed because the plaintiff failed to identify a specific contract term that was breached. The malpractice claim was properly dismissed because the complained of acts involved judgment and not malpractice. The fraud claim was properly dismissed because predictions of future events do not constitute fraud. The Appellate Court also affirmed the trial court’s refusal to allow a further amendment.

Navar v. Tribler, Orpett and Meyer, P.C., 2015 IL App (1st) 142641-U

(This is for informational purposes and is not legal advice.)

Recent Illinois Case: Banks v. Casson

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This recent case involved a dispute between attorneys over failure to pay a lawyer referral fee.  The attorneys never obtained signed written consent from the client for the referral fee, as required by Rule 1.5 of the Illinois Rules of Professional Conduct. Nonetheless, the attorney who was allegedly owed the fees filed a lawsuit, seeking damages for breach of fiduciary duty (under a joint venture theory) and fraud.  The First District affirmed dismissal, holding that the breach of fiduciary duty claim failed because the “joint venture” was based on an unenforceable agreement.   The fraud claim was time barred.

Banks v. Casson, 2015 IL App (1st) 133141-U

(This is for informational purposes and is not legal advice.)