Archives for August 2016

Indy Skyline Photo Spat At Heart Of 7th Circuit’s Gloss on Affirmative Defenses, Res Judicata and Fed. Pleading Amendments – Bell v. Taylor (Part I)

Litigation over pictures of the Indianapolis skyline form the backdrop for the Seventh Circuit’s recent examination of the elements of a proper affirmative defense under Federal pleading rules and the concept of ‘finality’ for res judicata purposes in Bell v. Taylor.

There, several small businesses infringed plaintiff’s copyrights in two photographs of downtown Indianapolis: one taken at night, the other in daytime.  The defendants – an insurance company, a realtor, and a computer repair firm – all used at least one the plaintiff’s photos on company websites.  When the plaintiff couldn’t prove damages, the District Court granted summary judgment for the defendants and later dismissed a second lawsuit filed by the plaintiff against one of the defendants based on the same facts.  The plaintiff appealed.

The Seventh Circuit affirmed summary judgment of the first lawsuit and dismissal of the second action on both procedural and substantive grounds.

Turning to the claims against the computer company defendant, the court noted that the defendant denied using the plaintiff’s daytime photo.  The defendant used only the nighttime photo.  The plaintiff argued that the defendant failed to comply with Rule 8(b) by not asserting facts to support its denial that it used plaintiff’s daytime photo.

Rejecting this argument, the court noted that a proper affirmative defense limits or excuses a defendant’s liability even where the plaintiff establishes a prima facie case.  If the facts that underlie an affirmative defense are proven true, they will defeat the plaintiff’s claim even if all of the complaint allegations are true.  A defendant’s contesting a plaintiff’s factual allegation is not an affirmative defense.  It is instead a simple denial.  Since the computer defendant denied it used the daytime photo, there was no affirmative matter involved and the defendant didn’t have to comply with Rule 8’s pleading requirements.

The Seventh Circuit also affirmed the denial of the plaintiff’s attempt to amend his complaint several months after pleadings closed.  In Federal court, the right to amend pleadings is broad but not absolute.  Where allowing an amendment would result in undue delay or prejudice to the opposing party, a court has discretion to refuse a request to amend a complaint.  FRCP 15(a)(2).  Here, the Court agreed with the lower court that the plaintiff showed a lack of diligence by waiting until well after the amending pleadings deadline passed.  The plaintiff’s failure to timely seek leave to amend its complaint supported the court’s denial of its motion.

The Court also affirmed the District Court’s dismissal of the plaintiff’s second lawsuit on res judicata grounds.  When the District Court entered summary judgment for defendants on plaintiff’s copyright and state law claims (conversion, unfair competition), plaintiff’s equitable relief claims (declaratory judgment and injunctive relief) were pending.  Because of this, the summary judgment order wasn’t final for purposes of appeal.  (Plaintiff could only appeal final orders – and until the court disposed of the equitable claims, the summary judgment order wasn’t final and appealable.)

Still, finality for res judicata purposes is different from appellate finality.  An order can be final and have preclusive effect under res judicata or collateral estoppel even where other claims remain.  This was the case here as plaintiff’s sole claim against the computer company defendant was for copyright infringement.  The pending equitable claims were directed to other defendants.  So the District Court’s summary judgment order on plaintiff’s copyright infringement claims was final as to the computer defendant.  This finality triggered res judicata and barred the plaintiff’s second lawsuit on the same facts.

Afterwords:

The case’s academic value lies in its thorough summary of the pleading requirements for affirmative defenses and the factors guiding a court when determining whether to permit amendments to pleadings.  The case also stresses that finality for appeal purposes is not the same as for res judicata or collateral estoppel.  If an order disposes of a plaintiff’s claims against one but not all defendants, the order is still final as to that defendant and the plaintiff will be precluded from later filing a second lawsuit against that earlier victorious defendant.

Three-Year Limitations Period Governs Bank Customer’s Suit for Misapplied Deposits – IL First Dist.

Now we can add PSI Resources, LLC v. MB Financial Bank (2016 IL App (1st) 152204) to the case canon of decisions that harmonize conflicting statutes of limitations and show how hard it is for a corporate account holder to successfully sue its bank.

The plaintiff, an assignee of three related companies**, sued the companies’ bank for misapplying nearly $400K in client payments over a several-year period.  The bank moved to dismiss, arguing that plaintiff’s suit was time-barred by the three-year limitations period that governs actions based on negotiable instruments.***  The court dismissed the complaint and the plaintiff appealed.

Held: Affirmed

Reasons:

The key question was whether the Uniform Commercial Code’s three-year limitations period for negotiable instrument claims or the general ten-year period for breach of written contract actions applied to the plaintiff’s negligence suit against the bank.  The issue was outcome-determinative since the plaintiff didn’t file suit until more than three years passed from the most recent misapplied check.

Illinois applies a ten-year limitations period for actions based on breach of written contract.  735 ILCS 5/13-206.  By contrast, an action based on a negotiable instrument is subject to the shorter three-year period.  810 ILCS 5/4-111.

If the subject of a lawsuit is a negotiable instrument, the UCC’s three-year time period applies since UCC Article 4 actions based on conversion and Article 3 suits for improper payment both involve negotiable instruments.  810 ILCS 5/3-118(g)(conversion); 810 ILCS 5/4-111 (improper payment).

Rejecting plaintiff’s argument that this was a garden-variety breach of contract action to which the ten-year period attached, the court held that since plaintiff’s claims were essentially based on banking transactions, the three-year limitations period for negotiable instruments governed. (¶¶ 36-38)

Where two statutes of limitations arguably apply to the same cause of action, the statute that more specifically relates to the claim applies over the more general statute.  While the ten-year statute for breach of written contracts is a general, “catch-all” limitations period, section 4-111’s three-year rule more specifically relates to a bank’s duties and obligations to its customers.

And since the three-year rule was more specific as it pertained to the plaintiff’s improper deposit and payment claims, the shorter limitations period controlled and plaintiff’s suit was untimely.

The court also sided with the bank on policy grounds.  It stressed that the UCC aims to foster fluidity and efficiency in commercial transactions.  If the ten-year period applied to every breach of contract action against a bank (as plaintiff argued), the UCC’s goal of promoting commercial finality and certainty would be frustrated and possibly bog down financial deals.

The other plaintiff’s argument rejected by the court was that the discovery rule saved the plaintiff’s lawsuit.  The discovery rule protects plaintiffs who don’t know they are injured.  It suspends (tolls) the limitations period until a plaintiff knows or should know he’s been hurt.  The discovery rule standard is not subjective certainty (“I now realize I have been harmed,” e.g.).  Instead, the rule is triggered where “the injured person becomes possessed of sufficient information concerning his injury and its cause to put a reasonable person on inquiry to determine whether actionable conduct is involved.” (¶ 47)

Here, the evidence was clear that plaintiff’s assigning companies received deposit statements on a monthly basis for a several-year period.  And the monthly statements contained enough information to put the companies on notice that the bank may have misapplied deposits.  According to the court, these red flags should have motivated the plaintiff to dig deeper into the statements’ discrepancies.

Take-aways:

This case suggests that an abbreviated three-year limitations period applies to claims based on banking transactions; even if a written contract – like an account agreement – is the foundation for a plaintiff’s action against a bank.  A plaintiff with a possible breach of contract suit against his bank should take great care to sue within the three-year period when negotiable instruments are involved.

Another case lesson is that the discovery rule has limits.  If facts exist to put a reasonable person on notice that he may have suffered financial harm, he will be held to a shortened limitations period; regardless of whether he has actual knowledge of harm.

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**  The court took judicial notice of the Illinois Secretary of State’s corporate registration database which established that the three assigned companies shared the same registered agent and business address.

*** 810 ILCS 5/3-104 (“negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.)

 

Six-year Delay in Asking For Earnest Money Back Too Long – IL Court Applies Laches Defense

Earlier this year, an Illinois appeal court examined the equitable defense of laches in an earnest money dispute between two contracting parties and former friends.  Derived from an archaic French word – laschesse – meaning “dilatory,” laches applies where a plaintiff sits on his legal rights to the point where it’s unfair to make a defendant mount a defense to the delayed claim.

The 2005 real estate contract at issue in Gardner v. Dolak, 2016 IL App (3d) 140848-U fell through and at different points in 2009 and 2011, the plaintiff buyer asked for her $55,000 deposit back.  The seller’s exclusive remedy for a buyer breach was retention of the buyer’s earnest money.

The contract also set specific deadlines for the plaintiff to complete a flood plain study and topographical survey.  When the plaintiff failed to meet the deadlines, the sale fell through.  Plaintiff sued when the Defendant refused to refund the earnest money deposit.

After a bench trial, the trial court entered judgment for the seller defendant on the basis that the plaintiff waited too long to sue and the delay in suing prejudiced the defendant.

The appeals court affirmed and sketched the contours of the laches doctrine:

  • Laches is an equitable doctrine that prevents a party from asserting a claim where he unreasonably delayed pursuing the claim and the delay misled or prejudiced his opponent;
  • Laches is based on the principle that courts will not aid a party who has knowingly sat on his rights that could have been asserted earlier;
  • To win a laches defense, the defendant must show (1) plaintiff lacked diligence in presenting his claim, and (2) the plaintiff’s delay resulted in prejudice;
  • The mere passage of time is not enough though; the defendant must show prejudice or hardship on top of the chronological delay;
  • In the context of real estate, wide property value fluctuations that harm the party claiming laches is evidence of prejudice that will support a finding of laches;
  • A party can successfully assert laches where the plaintiff remains passive and the defendant incurs risk, enters into obligations, or makes monetary expenditures.

Agreeing that the evidence supported the laches finding, the appeals court pointed out that plaintiff didn’t notify the defendant she wasn’t going through with the purchase until 6 years after the contract was signed.  During this six years, the value of the property declined markedly and the seller defendant spent considerable funds to maintain the property.

Taken together, the passage of time between contract execution (2005) and plaintiff’s lawsuit (2011) and measurable prejudice (based on the property’s drop in value) to the seller defendant was enough to support the trial court’s laches judgment.

Afterwords:

This case presents a straightforward summary of laches in the real estate context.  The party claiming laches must show more than mere passage of time between the claimed injury and the lawsuit filing date.  He must also demonstrate changed financial position as a result of the lapse of time.

Here, the property’s precipitous drop in value in the six years between contract’s execution and termination was a key factor cementing the court’s laches finding.  The question I had after reading this was what if the value of the property doubled or tripled in the interim 5 years?  Would the defendant still be able to prove laches?  Maybe so but that would be a harder sell.  The defendant would need to show the amount he spent maintaining the property over the six years exceeded the increase in property value.