Archives for February 2014

Rescission Based On Mistake and Fraud: An IL Case Note

Blackhawk State Bank, Inc. v. Al’s Motorhome and Trailer Sales, Inc., 2013 IL App (2d) 130316-U (2013), illustrates in stark relief the perils of entering high-dollar “handshake” real estate contracts.  

The plaintiff bank sued to foreclose on farm land after a borrower (the “Seller”) defaulted on a multi-million dollar loan.  The loan was used to fund the Seller’s mobile home business. 

But before the bank’s foreclosure suit, the Seller “sold” the property to defendant for $825,000 as part of a handshake agreement.  The Seller never told defendant about the bank’s nearly $7M mortgage on the land and the defendant never asked. 

The defendant also never ordered a title search and didn’t check tax records either.  He took the Seller’s word on all aspects of the deal and no written contract was prepared to document it.

Defendant paid the Seller $825,000 to buy the farm land in two installments.  But instead of crediting defendant’s payments to the purchase price, the Seller – used the funds to pay down the mortgage held by the plaintiff.

When defendant learned of the bank’s mortgage on the property, he sought the return of his first $425,000 payment.  The bank said no and filed a foreclosure suit because the underlying loan was by that time in default. 

The defendant counter-sued for unjust enrichment and rescission based on mistake and fraud.  The trial court dismissed the defendant’s rescission claims on the bank’s motion to dismiss and on the unjust enrichment claim, entered judgment for the bank after a bench trial. Defendant appealed.

The defendant’s unjust enrichment claim failed because he couldn’t show that he had a superior right over the bank to the $425,000 in purchase funds. 

To prove unjust enrichment, a plaintiff must show that the defendant unjustly retained a benefit to plaintiff’s detriment and that defendant’s retention of the benefit violates fundamental principles of justice, equity and good conscience. 

In situations where the benefit flows from a third party, unjust enrichment applies where the plaintiff has a better claim to the benefit than the defendant.  ¶¶ 15-18.

The Court found that the bank had a “better claim” to the sale proceeds than did defendant.  This was because the bank had no knowledge of defendant’s handshake deal with the Seller and the bank was owed millions of dollars from the bankrupt Seller. 

The Court also focused on defendant’s own negligence in not performing any due diligence concerning the property and exhibiting a “lax approach” to a high-dollar transaction with a complete stranger seller.  ¶¶ 30-33.

The court also upheld the dismissal of defendant’s rescission claims.  To state a claim for rescission premised on mistake, a plaintiff must show: (1) a serious and material mistake, (2) the mistake is so important that enforcement of the contract would be unconscionable; (3) the mistake occurred even though the party claiming rescission exercised due care; and (4) rescission can place the parties in the status quo.   ¶ 44.

The Court rejected defendant’s rescission-due-to-mistake arguments because defendant couldn’t establish that he exercised due care in the transaction.

The defendant land buyer failed to perform even rudimentary research on the property that would have shown the bank’s multi-million dollar mortgage lien.  This precluded a finding that defendant made a mistake that merited undoing the contract. ¶¶ 45-47.

The defendant’s fraud-based rescission claim – based on the Seller falsely telling defendant he owned the property free and clear – also failed.  The defendant couldn’t establish that he reasonably relied on the Seller’s statement.  Since defendant entered into a significant real estate transaction with (figuratively) eyes closed, he couldn’t plead or prove the reasonable reliance element for rescission based on fraud. ¶¶ 48-49.

AfterwordsBlackhawk shows how critical the “due care” element is for both a valid unjust enrichment and rescission claim.  If a litigant is unable to show that he exercised reasonable care in a transaction, his chances of undoing a transaction (rescission) or getting monies returned to him (via unjust enrichment) are slim to none.