What's fair game in high-stakes litigation
In a case that serves as a critical reminder of the power and limits of absolute privilege in litigation, the Illinois appellate court recently upheld the dismissal of defamation claims in a complex legal dispute over the administration of New Market Tax Credit Programs. When accusations fly and reputations hang in the balance, the line between protected legal maneuvering and actionable defamation can be razor thin.
In the underlying case filed on Jan. 18, 2023, Neil Freeman and other plaintiffs brought a complaint against defendants Michael Qualizza and Chad Goodall. The lawsuit alleged that Qualizza committed misconduct in his business operations relating to Aries Community Capital (ACC) and Urban Development Fund (UDF). The companies issued loans and investment opportunities for low-income communities by utilizing federal and state tax credits from New Market Tax Credit Programs. These programs were intended to attract private capital to underfunded areas.
Qualizza, vice president of ACC and manager of UDF, along with Freeman, had established ACC and UDF to administer these tax credit programs. In 2011, UDF ST was formed to manage the state-level tax credit venture. The complaint accused Qualizza and Goodall of exploiting conflicts of interest and misappropriating termination fees. Instead of splitting these fees proportionally between ACC and UDF ST, they directed 100% to UDF ST, misaligning with the services provided.
This conduct allegedly harmed both ACC and UDF ST and kept Freeman and other relevant stakeholders uninformed about the redirection of fees. Freeman uncovered the scheme after taking over UDF ST's management following Qualizza's removal. The lawsuit against Qualizza alleged breach of contract, breach of fiduciary duty, conversion, civil conspiracy, aiding and abetting, and defamation.
On Feb. 1, 2023, Qualizza counterclaimed against Freeman and filed a third-party complaint citing defamation based on a chain email communication including thirteen recipients. Freeman moved to dismiss Qualizza's counterclaim under Section 2-615 of the Illinois Code of Civil Procedure, asserting that the communications were protected by the absolute litigation privilege. The court found the statements were sufficiently related to the litigation and emphasized that any doubt should favor applying the privilege. On July 18, 2023, a motion was filed to dismiss the third-party complaint under Section 2-615, which the court granted on Aug. 7, 2023. The case proceeded to the appeals stage.
On appeal, Qualizza argued that the circuit court incorrectly dismissed his claims based on the absolute litigation privilege. The dismissal was made pursuant to Section 2-615 of the Illinois Code of Civil Procedure, which challenges the legal sufficiency of a complaint based on defects apparent from the face of the pleading. Under this section, courts must accept all well-pleaded facts and reasonable inferences as true and may also consider information in attachments to the pleading. Dent v. Constellation NewEnergy, Inc., 2022 IL 126795.
Typically, a motion asserting privilege for dismissal is brought under Section 2-619, where the defendant acknowledges the complaint's allegations but argues that an affirmative defense, such as privilege, bars the claim. However, Section 2-615 can be used to assert the absolute litigation privilege when its applicability is clear from the face of the complaint and its attachments. In this case, it was evident from Qualizza's counterclaim, third-party complaint, and the attached exhibits that the three contested publications were protected by the absolute litigation privilege. Therefore, the circuit court did not err in dismissing Qualizza's claims under Section 2-615.
The absolute litigation privilege, as outlined in Restatement (Second) of Torts §586 (1977), provides that a party is fully protected when making potentially defamatory statements in communications related to a judicial proceeding, as long as they are relevant to the proceeding. This protection extends to parties in litigation under §587. The basis of the privilege is that, despite potentially actionable conduct, communications in the interest of justice and social importance are shielded. This principle was affirmed in Atkinson v. Affronti, 369 Ill. App.3d 828 (2006). The privilege covers communications before, after, during and after litigation. Bedin v. Nw. Mem'l Hosp., 2021 IL App (1st) 190723. Illinois courts have broadened the application of this privilege to include attorney conduct beyond mere communication, provided that such actions further the representation of their clients.
In order to determine if a publication qualifies for the absolute litigation privilege, courts examine what is referred to as the pertinency requirement. A communication meets this requirement if it relates to the litigation and furthers the legal representation. O'Callaghan v. Satherlie 2015 Il. App.(1st) 142152. The standard for pertinency is broad, with any doubt resolved in favor of finding a communication pertinent. Communications with third parties can be protected by the privilege if those third parties have an interest in the litigation; however, communications unrelated to the case may fall outside the privilege's protection.
The analysis hinged on two key questions: whether the publications related to the underlying litigation and whether the recipients had a sufficient interest in the litigation. Applying precedents such as O'Callaghan, and Bedin, it was concluded that the publications met the pertinency requirement. Specifically, an email chain inquiring about UDF's funding triggered the publications. These included an email from a stakeholder attaching the complaint and Freeman's follow-up, all of which sought to address the inquiry and clarify the impact of the litigation on the funding status. The emails, while not specifically detailing termination fee splits, were directly connected to explaining the litigation's effect on the project at issue.
Furthermore, the recipients of the email chain were interested parties. Qualizza's pleadings indicated the email recipients were connected to the project and were not random members of the public, fulfilling the privilege's requirement for interested parties.
Qualizza attempted to change the court's analysis by relying on the Corpus Juris Secundum's four requirements for the privilege, but Illinois' courts do not follow this doctrine. Illinois law only requires that communications meet the "pertinency" standard, which is broader. As discussed above, the privilege can apply before or after formal litigation, does not need to be made solely in judicial proceedings and extends to communications beyond achieving the direct objects of litigation. It also protects statements made to third parties, as long as they are pertinent to the case, without needing specific legal authorization. Kurczaba v. Pollock, 318 Ill. App. 3d at 702 (quoting 53 C.J.S. Libel & Slander § 72, at 132 (1987)). Qualizza's argument that the privilege did not apply due to a failure to meet the Corpus Juris Secundum criteria was therefore unfounded.
Qualizza's challenge based on pertinency also fell short. First, Illinois courts do not extend the privilege to statements made to the public or media; however, this does not apply here since the complaint was not leaked to the media or general public. Their communication involved an email chain with 13 recipients, all of whom had a vested interest in the litigation. Second, Illinois courts may restrict the privilege for communications sent to family members of those involved in the case. The publications in this case were not sent to Qualizza's family or friends. His claim that they were sent to uninvolved individuals because recipients were not directly concerned with the termination fee division was overly restrictive. While recipients might not be focused on specific financial details between parties, their concern with the litigation's impact on future interactions involving Freeman, Qualizza, and related entities sufficiently met the pertinency requirement.
Qualizza also argued that the absolute litigation privilege should not apply because the publications did not involve a matter of social importance. This reasoning is flawed, as the concept of social importance justifies the privilege's existence but is not required for its application. Even if it were relevant, the publications align with an attorney's duty to zealously represent a client, which the privilege is designed to protect. The communications pertain to informing business associates about the impact of litigation on shared interests, supporting policy goals of the privilege.
Since the publications are protected by the absolute litigation privilege, the court did not need to address Qualizza's claims regarding defamation per se or innocent construction. The court concluded that the privilege clearly applied to the three publications in question, affirming the Circuit Court's decision to grant the motions to dismiss under Section 2-615.
This article originally appeared on Wood Smith Henning & Berman. https://www.wshblaw.com/
About the Authors:
Ryan M. Neri is a partner at Wood Smith Henning & Berman LLP. rneri@wshblaw.com
Laura Nishimura is a senior associate at Wood Smith Henning & Berman LLP. lnishimura@wshblaw.com
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Ryan M. Neri is a partner at Wood Smith Henning & Berman LLP. rneri@wshblaw.com
Laura Nishimura is a senior associate at Wood Smith Henning & Berman LLP. lnishimura@wshblaw.com
