Substantial Performance Doctrine: Contractor Defeats Finicky Homeowners in Construction Case (the ‘You Missed A Spot’ Post)

Two diva-esque homeowners (I don’t judge; I just report) who demanded impossible perfection from a contractor got slapped with a $100,000-plus bench trial verdict in Wolfe Construction v. Knight, 2014 IL App (5th) 130115-U. Affirming the damage award, the appeals court gave content to the substantial performance doctrine, expanded on the requirement of contractual definiteness and applied the governing standards for recovering contractual interest and attorneys’ fees,

The plaintiff contractor was hired to perform renovation work on the defendants’ home after a fire damaged the home.  The written contract required the homeowners to pay for any extras and to also foot the bill for any services not covered by their homeowners’ insurance.  Over a span of about a year, the contractor completed nearly all of the restoration work (about 95% of it) and performed some $30,000 of additional work including interior painting, building a new porch and custom-ordering and installing kitchen cabinets – all at the defendants’ specific request.  But according to the homeowners, the contractor’s work was lacking and the homeowners refused to pay and kicked the contractor off the job.  The contractor sued for breach of contract and after a bench trial, won a $100,000-plus judgment against the homeowners, including amounts for unpaid services, extras, contractual interest and attorneys’ fees.  The homeowners appealed.

Held: Money judgment for the contractor affirmed.

Rules/Reasoning:

The Court upheld the judgment for the contractor; noting that the defendants demanded “perfection and the impossible.”  The law doesn’t require surgical precision in construction contract performance.  Instead, the contractor is held only to the duty of substantial performance in a workmanlike manner.  For substantial performance, a contractor must show there was an honest and faithful performance of the contract in its material and substantial aspects.  The contractor must also demonstrate there was no willful departure from, or omission of the contract’s essential elements.  A nebulous standard, the substantial performance test depends on the unique facts of each case.  (¶33).

During trial, both sides presented expert testimony in support of their position and the Court found that the contractor completed about 95% of the job before the defendants fired it (the contractor).  (¶¶ 25-26).  And since the defects asserted by the homeowners involved items which pre-dated the contractor’s involvement, the Court found those deficiencies weren’t the contractor’s fault.  The Court also found the homeowner’s blatantly biased expert’s testimony to be incredible and even “laughable.”  For these reasons, the Court sided with the contractor on all issues. (¶34).

The Court also affirmed the trial court’s award of interest and attorneys’ fees under the contract; but against only one of the homeowners.  Interest and attorneys’ fees generally are not recoverable unless specified in a written contract.  ¶¶36-37.  If a contract does provide for interest and attorneys’ fees, only the party that signs the contract will have to pay them.  (¶ 37).  Here, the parties’ construction contract clearly delineated that the homeowners would be responsible for the contractor’s attorneys’ fees and would have to pay monthly interest at 1.5% on tardy amounts if the contractor sued. The Court held that since the contractual interest and fee-shifting language was clear, it was enforceable – but only against the defendant that signed the contract.  The homeowner that didn’t sign the contract wasn’t responsible for the over $26,000 in interest and nearly $40,000 in attorneys’ fees awarded to the plaintiff contractor.  (¶ 38).

Aftermath:

Definitely a pro-contractor and anti-persnickety homeowner case.  I suppose perfectionism, as character trait and life ethos, has its merits.  But the law doesn’t require it; at least not in the construction setting.   This case illustrates in lurid detail the perils of a property owner having unrealistic and too-exacting expectations of his contractor.  Blemish-free work is not required under the law.  As this case amply shows, if a contractor substantially performs or is prevented from remedying or completing performance by a recalcitrant homeowner, the contractor will win.  Wolfe Construction also seems to set a fairly lenient benchmark for a contractor to establish substantial performance.  This case should and will likely give property owners pause before they declare a default and fail to pay a contractor.

 

 

 

Release and Satisfaction of Judgment and Guaranty Liability – IL Law

ReleaseBrahos v. Chickerneo,  2014 IL App (2d) 130543-U, examines Illinois money damages rules, the extent of a guarantor’s liability and satisfaction-of-judgment requirements against the backdrop of a business dispute involving a failed car dealership.

The plaintiff got a multi-million dollar fraud judgment against multiple defendants that stemmed from a failed car dealership business venture.  In post-judgment proceedings, the dealership was sold and the sale proceeds satisfied plaintiff’s judgment against all defendants except for one.  That remaining defendant then moved to dismiss the citation proceedings and for satisfaction of the remaining judgment balance – about $600K.  The trial court agreed and ordered the judgment satisfied.  The plaintiff appealed.

Held: Reversed.  The $600,000 still owed the plaintiff on the money judgment was not satisfied by the bank releasing the investor guarantors from liability under the various dealership loans.

Rules/Reasoning:

Reversing the trial court and finding that the plaintiff still could purse defendant for the balance of the money judgment, the Court applied several salient guaranty and release/satisfaction-of-judgment rules:

– Generally, the discharge of the principal obligation discharges the guarantor’s obligation;

Code Section 12-183 (735 ILCS 5/12-183) requires a judgment creditor to sign a release and satisfaction of judgment so that the debtor can record that release with the Court that entered the judgment

– the party seeking the release of a judgment bears the burden of proving that a judgment entered against him was released;

– a release is a contract and is governed by contract law;

– the contracting parties intention is determined by the plain language of the contract;

– it is only where a contract is ambiguous (reasonably susceptible to two opposing meanings) that evidence is allowed in to explain what the contracting parties intended;

– typically, a money judgment can only be satisfied by paying the judgment unless the parties agree otherwise.

(¶¶ 32-35).

The Second District sided with the plaintiff and found that his money judgment shouldn’t have been deemed satisfied by the trial court.  The plaintiff never agreed to release his money judgment against the defendant and there was no evidence that plaintiff agreed to accept a “noncash benefit”- namely, the release from his guarantor liability to the bank.

The Court also pointed to the promissory note that required defendant to pay the judgment’s remaining $600K to the plaintiff.  The bank’s release of the dealership investors from their loan and guaranty liabilities didn’t  affect the defendant’s note liability.

In addition, the dealership lender’s release of the various investors (including plaintiff) from their bank obligations didn’t mention plaintiff’s damage award against the remaining defendant. (¶ 35).

The defendant’s double recovery argument – that the plaintiff got a windfall having his guaranty liability to the bank released while getting paid $600K from the defendant – was also rejected. 

The Court found there was no double recovery because plaintiff was not getting paid twice for the same injury and the bank was not a “joint tortfeasor” with the defendant.  Instead, the bank was a third-party creditor. ¶ 37.

Take-aways: 

–  A release of judgment will be construed as written and not expanded beyond its clear terms;

– A creditor isn’t required to release a money judgment unless that creditor is paid or the parties agree otherwise.  

Fair Debt Collection Practices Act and the ‘Overshadowing’ Demand Letter – Part II of II

Part II – 5.5.14 12:14 p.m.

In Vincent v. Chuhak & Tecson 2014 WL 1612697 (N.D.Ill. 2014) the Court denied the Firm’s motion to dismiss the plaintiffs’ FDCPA claims because it was at least plausible that the Firm’s demand letter was confusing and contradictory to the “unsophisticated consumer.”  All that’s required for a plaintiff to survive a Rule 12(b)(6) motion is that a Complaint allege facts that plausibly state a valid claim. 

The Court first noted that Section 1692g of the Act requires a debt collector, within five days of initial communication with a consumer, to provide a written “validation notice.”  The validation notice must contain (1) a statement that unless the consumer disputes the validity of the debt within 30 days after receipt of the notice, the debt will be assumed valid; and (2) a statement notifying the consumer that if he disputes the debt in writing within that 30-day period, the debt collector will obtain verification of the debt and mail a copy of it to the consumer.  The FDCPA cautions that collection activities and communications must not “overshadow” or be “inconsistent” with the disclosure requirements of the validation notice. 15 U.S.C. § 1692g(b); Vincent, *1.

In determining whether a creditor’s demand letter satisfies the FDCPA’s validation strictures, the court applies the “unsophisticated consumer” standard.  Whether a demand letter is confusing under the unsophisticated consumer standard is a fact-based inquiry decided on a case-by-case basis.  But if it’s plain from a reading of the demand letter that a significant fraction of the population wouldn’t be misled, the demand letter complies with the FDCPA.

The Northern District held that the Firm’s demand letter was confusing because there was an “apparent” contradiction between (a) allowing the unit owner to contest the validity of the debt, and (b) simultaneously stating that if the unit owner didn’t pay within 30 days, his right to possession of the condo would end. Vincent, *2-3. 

What Should Have the Demand Letter Said?

The Firm’s demand letter would satisfy the FDCPA if it included “safe harbor” language that explained the letter’s apparent inconsistencies.  The model “safe harbor” language suggested by the Seventh Circuit (a so-called “Bartlett letter”) provides that (1) the creditor doesn’t have to wait until the end of the thirty-day period before suing to collect this debt; but (2) if the debtor requests proof of the debt or of the name and address of the original creditor within that thirty-day period, (3) the creditor must suspend its collection efforts, and stop any litigation based on the debt.  Vincent, *3; Bartlett v. Heibl, 128 F.3d 497 (7th Cir. 1997).

The Court also rejected the Firm’s argument that the letter complied with the FDCPA because the 30-day letter was required by the Illinois Forcible statute.  735 ILCS 5/9-104.1 (30-demand notice on delinquent unit owner  requirement).  The Court held that when sending a demand letter to a debtor, the Firm still has a duty under the FDCPA to explain how the debt collector’s rights fit with the consumer’s.  And since the Firm failed to do this (reconcile the creditor’s and consumer’s rights), the Firm’s demand letter violated the Act and the plaintiffs’ FDCPA claims survived dismissal.

Notes: The case provides some much-needed guidance on the contents of a proper demand letter under the FDCPA in a delinquent condo assessment case.  In my practice, I always recommend that my association (or landlord) clients serve the 30-day (or 5-day) notice.  That way, the unit owner or tenant can’t claim a FDCPA violation since the landlord likely won’t qualify as a “debt collector” under the FDCPA (i.e. the landlord’s main business is renting properties; not collecting debts).