Archives for December 2016

Amending Pleadings In Illinois: The Four-Factored Test – A Case Note

Illinois follows a policy of expansively allowing amendments to pleadings so cases can be decided on their merits instead of technicalities.  And while parties are generally given a lot of latitude to amend, the right to do so is not absolute.  The Court still has broad discretion to permit or disallow a request to amend.

Zweig v. Bozorgi Limited Partnership, 2016 IL App (1st) 152628-U, a business dispute lawsuit, provides a useful synopsis of Illinois’s governing pleading amendment factors and gives clues as to when a court exceeds its bounds in refusing an attempt to amend.

The Zweig plaintiff filed breach of contract, fiduciary duty and fraud counts against various defendants stemming from a failed partnership.  The plaintiff alleged he was tricked into investing $2M into a failed ambulatory surgical partnership.  The trial court first denied the plaintiff’s request to amend its complaint and then dismissed the complaint with prejudice.  Plaintiff appealed.

Reversing, the appeals court first stated the well-settled principles that govern pleading amendments in Illinois.  At any time before final judgment, a party can amend its pleading to change the parties, facts or causes of action.

The four factors a court considers when deciding whether to allow an amended pleading are: (1) whether the proposed amendment cures the defective pleading; (2) whether other parties would sustain prejudice or surprise by virtue of the proposed amendment; (3) whether the proposed amendment is timely; and (4) whether previous opportunities to amend could be identified.

The most important factor is the second one – whether there is prejudice or surprise to the opponent if the pleading is amended.  Prejudice is shown where a delay in seeking to amend leaves a defendant unprepared to defend a new theory at trial.  Where a defendant still has time to take discovery and prepare a defense, there will be no prejudice.

(¶¶ 12-13, 18-19)

In finding the trial court overreached in denying the plaintiff’s attempt to amend, the appeals court noted that in the early pleading stage, a plaintiff should be allowed to amend his complaint where the proposed amendment cures any defects in the current (prior) complaint.  The court also held there was no prejudice to the defendant since in the amended pleading, plaintiff was proceeding on the same legal claims he previously filed – he just amplified some of the key facts.

Addressing the third and fourth amendment to pleading factors, the Court found the proposed amended complaint timely since it was brought within one month of the filing date of the defendants’ motion to dismiss the prior Complaint.  In addition, this was only the plaintiff’s second request to amend and the first request was done only to preserve its appeal rights on an unrelated count.  Taken together, the four factors weighed in favor of allowing the plaintiff to amend its complaint.

Take-aways:

This case serves as a recent and relevant illustration of the pleading amendment guideposts in Illinois.  While a court has broad discretion to grant or deny a request to amend, that discretion still has some checks on it.

The case also teaches that if the denial of a motion to amend prevents a party from fully presenting its claim and if the opposing party has time to discover and defend against the amended pleading’s salient facts, there is likely no danger of prejudice or unfair surprise and the court should err on the side of allowing the proposed amendment.

 

Property Subject to Turnover Order Where Buyer Is ‘Continuation’ of Twice-Removed Seller – Corporate Successor Liability in Illinois

Advocate Financial Group, LLC v. 5434 North Winthrop, 2015 IL App (2d) 150144 focuses on the “mere continuation” and fraud exceptions to the general rule of no successor liability – a successor corporation isn’t responsible for debts of predecessor – in a creditor’s efforts to collect a judgment from a business entity that is twice removed from the original judgment debtor.

The plaintiff obtained a breach of contract judgment against the developer defendant (Company 1) who transferred the building twice after the judgment date. The second building transfer was to a third-party (Company 3) who ostensibly had no relation to Company 1. The sale from Company 1 went through another entity – Company 2 – that was unrelated to Company 1.

Plaintiff alleged that Company 1 and Company 3 combined to thwart plaintiff’s collection efforts and sought the turnover of the building so plaintiff could sell it and use the proceeds to pay down the judgment. The trial court granted the turnover motion on the basis that Company 3 was the “continuation” of Company 1 in light of the common personnel between the companies.  The appeals court reversed though.  It found that further evidence was needed on the continuation exception but hinted that the fraud exception might apply instead to wipe out the Company 1-to Company 2- to Company 3 property transfer.

On remand, the trial court found that the fraud exception (successor can be liable for predecessor debts where they fraudulently collude to avoid predecessor’s debts) indeed applied and found the transfer of the building to Company 3 was a sham transfer and again ordered Company 3 to turn the building over to the plaintiff. Company 3 appealed.

The appeals court affirmed the trial court’s judgment and in doing so, provided a useful summary of the principles that govern when one business entity can be held responsible for another entity’s debts.

In Illinois, a corporation that purchases the assets of another corporation is generally not liable for the debts or liabilities of the transferor corporation. The rule’s purpose is to protect good faith purchasers from unassumed liability and seeks to foster the fluidity of corporate assets.

The “fraudulent purpose” exception to the rule of no successor liability applies where a transaction is consummated for the fraudulent purpose of escaping liability for the seller’s obligations.

The “mere continuation” exception to the nonsuccessor liability rule requires a showing that the successor entity “maintains the same or similar management and ownership, but merely wears different clothes.”  The test is not whether the seller’s business operation continues in the purchaser, but whether the seller’s corporate entity continues in the purchaser.

The key continuation question is always identity of ownership: does the “before” company and “after” company have the same officers, directors, and stockholders?

In Advocate Financial, the factual oddity here concerned Company 2 – the intermediary.  It was unclear whether Company 2 abetted Company 1 in its efforts to shake the plaintiff creditor.  The court affirmed the trial court’s factual finding that Company 2 was a straw purchaser from Company 1.

The court focused on the abbreviated time span between the two transfers – Company 2 sold to Company 3 within days of buying the building from Company 1 – in finding that Company 2 was a straw purchaser. The court also pointed to evidence at trial that Company 1 was negotiating the ultimate transfer to Company 3 before the sale to Company 2 was even complete.

Taken together, the court agreed with the trial court that the two transfers (Company 1 to Company 2; Company 2 to Company 3) constituted an integrated, “pre-arranged” attempt to wipe out Company 1’s judgment debt to plaintiff.

Afterwords:  This case illustrates that a court will scrutinize property transfers that utilize middle-men that only hold the property for a short period of times (read: for only a few days).

Where successive property transfers occur within a compressed time window and the ultimate corporate buyer has substantial overlap (in terms of management personnel) with the first corporate seller, a court can void the transaction and deem it as part of a fraudulent effort to evade one of the first seller’s creditors.

Neighbors’ Constant Hoops Shooting Not ‘Objectively Offensive’ Enough to Merit Nuisance Liability – IL 4th Dist.

The Illinois 4th District recently bounced two homeowners’ lawsuit against their next-door neighbors for installing a basketball court on the neighbors’ property.  Fed up with the neighbor kids’ incessant basketball playing, the plaintiffs in Bedows v. Hoffman, 2016 IL App (4th) 160146-U sued for injunctive relief and damages.

The plaintiffs’ complaint alleged the basketball court violated written restrictive covenants that governed all homes in the neighborhood and that the defendants’ all-day (and much of the night) use of the court created a common law nuisance.

The trial court dismissed the plaintiffs’ claims and the plaintiffs appealed.

Affirming dismissal, the appeals court examines the key interpretative rules for residential restrictive covenants and the applicable standard of pleadings and proof for a nuisance claim.

In Illinois, restrictive covenants are construed and enforced according to their plain and unambiguous language;

The court’s goal in construing a restrictive covenant is to honor the parties’ intent at the time the covenant was made;

Covenants affecting real property are strictly construed so they don’t extend beyond their express language: all doubts as to whether a restriction applies is decided in favor of a landowner’s free use of property without restrictions

(¶¶ 56-57)

The court was tasked with deciding if a basketball court was a “building” – the property covenants barred any building (other than a single-family residence) within 10 feet of a property line.

Finding that the defendants’ basketball court was not a “building,” the Court looked to both Black’s and Webster’s dictionaries for guidance.  Each dictionary stated that walls, roof and an enclosed space were essential building components.  And since the basketball court had none of these elements, it didn’t meet the restrictions’ “building” definition.

A nuisance is a “substantial invasion of another’s interest in the use and enjoyment of his or her land.”  The invasion must be substantial (either intentional or negligent) and objectively (not subjectively) unreasonable.  To be actionable, the claimed nuisance must be physically offensive to the senses.  But “hypersensitive” individuals are not protected by nuisance law.

In addition, when a claim involves an activity deemed an accepted part of everyday life in a given community, it is especially hard to make out a nuisance case unless the plaintiff pleads unique facts that show how the challenged activity goes above and beyond what is commonplace.

Excessive noise can serve as the basis for a nuisance claim but it must be on the order of several dogs barking at all hours of the night.  A neighbor’s subjective annoyance at noise emanating from adjoining property isn’t extreme enough to merit nuisance relief under the law. (¶¶ 84-87)

In dismissing the plaintiffs’ nuisance claim, the Court first found that playing basketball didn’t qualify as “noxious or offensive” conduct under the covenants.  (The covenants outlawed noxious or offensive resident conduct.)  The Court also held that the plaintiffs failed to allege how the defendants’ use of the basketball court was any different from basketball playing by other neighborhood kids as the plaintiffs could document only a single instance of the defendants’ playing basketball after 10 p.m.

The Court noted that the plaintiffs failed to allege how the defendants’ use of the basketball court was any different from other kids’ court use as plaintiffs documented only a single instance where defendants’ played basketball after 10 p.m.

The Court then rejected the plaintiffs’ other covenant-based claim based on the “Allowable Structure” covenant that allowed property owners to erect single-family dwellings only on their lots.  Since a basketball court didn’t fit the dictionary definition of a structure (“a construction, production or piece of work”, i.e.), the Allowable Structure stricture didn’t apply.

Afterwords

This case illustrates how courts generally don’t like to meddle in private landowner disputes.  While the court does give some clues as to what is actionable nuisance under the law, the challenged conduct must go beyond everyday activity like playing basketball in a residential subdivision.