Appellate Court Revives Non-Profit’s Fraud Claims against Founder over Allegedly False Invoices

After a non-profit discovered some alleged invoicing irregularities it sued its founders and former directors and the companies that submitted the allegedly fraudulent invoices. The trial court dismissed the complaint. An Illinois appellate court reversed the trial court’s dismissal with regard to several of the fraud claims but affirmed the lower court’s dismissal of the remaining claims.

In 2002, Nancy Morgan and Donna Sardina formed and incorporated the National Alliance of Wound Care (NAWCO), a non-profit corporation that provides education and credentials for medical personnel in wound injuries. At its founding, Morgan and Sardina were NAWCO’s sole directors but were not on NAWCO’s board of directors as of 2016 or anytime thereafter.

Soon after incorporating NAWCO, Morgan and Sardina established for-profit corporations, Wound Care Education Institute, Inc. (WCEI) and Wild about Wounds (WOW). WCEI is in the business of providing training and education to medical professionals regarding skin, wound and ostomy care and management. WCEI provides courses to assist healthcare workers in preparing for the national certification exams developed by NAWCO. WOW provides a national conference and trade show for health care professionals in the wound care field.

In 2016, Morgan sent NAWCO an invoice totaling $243,500 on behalf of WCEI for meeting room rentals. In 2017, Morgan sent NAWCO a series of invoices totaling $654,000 on behalf of WCEI for various services. NAWCO paid each invoice upon receipt.

In November 2018, NAWCO filed suit against Morgan, Sardina, WCI and WOW alleging breach of contract, breach of fiduciary duty, fraud, conversion, and conspiracy. In the complaint, NAWCO alleged that these invoices Morgan submitted on behalf of WCEI were fraudulent because they contained charges for work never performed by WCEI and/or work for which NAWCO had already paid WCEI. NAWCO also alleged that WOW submitted charges totaling $583,744.34 to NAWCO from 2006 to 2015, for expenses that were “not legitimate” because of “the utter lack of supporting documentation for these significant charges.” After various amendments and motions to dismiss, the court dismissed NAWCO’s claims for failure to state a claim.

On appeal the Court found that the complaint had stated a claim for fraud against the defendants and reversed the trial court’s dismissal of those claims. The court affirmed dismissal of the remaining claims.

In assessing whether NAWCO adequately pleaded claims for fraud against WCEI, WOW, and Morgan, the court began its analysis by stating the elements of a claim for fraud that a plaintiff must allege: (1) a false statement of material fact; (2) the defendant knew the statement was false; (3) the defendant intended that the statement induce the plaintiff to act; (4) the plaintiff relied upon the truth of the statement; and (5) the plaintiff suffered damages from his reliance on the statement.

The Court determined that NAWCO properly pleaded false statements of material fact based on the invoices submitted by WCEI because invoices themselves constitute misrepresentations of fact where they contain charges for work not actually performed or items not actually provided by the defendant to the plaintiff. The Court also determined that NAWCO properly pleaded the remaining elements with regard to the claims concerning the invoices sent by Morgan on behalf of WCEI by pleading that Morgan was in control of WCEI’s billing, knew that the invoices were false, and intended NAWCO to rely on the invoices which it did to its injury. The Court however found that the fraud claims against WOW failed because the complaint only alleged that WOW failed to submit supporting documentation with its invoices and did not allege that the invoices were false.

The court affirmed the dismissal of the breach of fiduciary claims because the complaint failed to establish the existence of a fiduciary duty. Although the complaint alleged that Morgan and Sardina were officers, directors, and employees of NAWCO at some point, they failed to allege that they held any of these roles at the time the allegedly fraudulent invoices were sent to NAWCO. Finally, the court found that NAWCO failed to state a claim for breach of contract because it only alleged that “an agreement arose between WCEI and NAWCO,” which the Court found to be conclusory and inadequate to establish the existence of a contract.

The Court’s full opinion can be found here.

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