Archives for February 2017

Commercial Landlord Not Obligated to Accept Substitute Tenant Where No Sublease Offered – IL 1st Dist.

When a commercial tenant’s business is failing, it’s fairly common for the tenant to tender a sublessee to the landlord as a way to avoid a future damages lawsuit and judgment.

Gladstone Group I v. Hussain, 2016 IL App (1st) 141968-U, examines when a non-breaching landlord must accept a proposed sub- or new tenant from a defaulting lessee and what conduct satisfies the landlord’s duty to mitigate damages.

When the corporate tenant’s barbecue restaurant foundered, the landlord sued the lease guarantors to recover about $60K in unpaid rent.  At trial, the guarantors provided written and oral evidence that it offered three potential subtenants to the landlord – all of whom were refused by the landlord.

The trial court found that the landlord violated the lease provision prohibiting the landlord from unreasonably refusing consent to a sublease offered by the tenant.  Critical to the trial court’s ruling was the fact that the tenant proposed a subtenant who offered to pay $7,500 per month – only about $800 less than the monthly sum paid by the defaulting tenant.

The landlord appealed.  It argued that the lease did not require landlord to accept an offer that wasn’t an actual sublease or to agree to accept less rent than what a breaching tenant owed under a lease.

Held: Reversed

Reasons:

The critical fact was that no prospective tenant contacted by the defendant submitted a sublease to the landlord.  Instead, all that was given were “offers” to lease the premises. There was no evidence that any of the businesses that submitted offers were ready willing and able to step into defendant’s shoes.  While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.

While a landlord’s refusal of various subtenant offers is relevant to the landlord’s duty to mitigate, the burden is still on the defaulting tenant to prove that the proposed subtenant is ready willing and able to assume the tenant’s lease duties.

Since the tenant failed to carry its burden of proving the subtenant’s present ability to take over the lease, the Court found that the landlord was within its rights to refuse the different subtenant’s overtures.  The appeals court remanded the case so the trial court could decide whether the landlord satisfied its duty to mitigate since the evidence was conflicting as to the landlord’s post-abandonment efforts to re-let the premises. (¶¶ 23-25)

The dissenting judge found that the landlord failed to satisfy its duty to mitigate damages.  It noted trial testimony that for several months from the date tenant vacated the property, the landlord did nothing.  It didn’t start showing the property to prospective tenants until several months after the tenant’s abandonment.

The dissent also focused on the landlord’s refusal to meet with or follow-up with the three prospects brought to it by the defaulting tenant.  It cited a slew of Illinois cases spanning nearly five decades that found a non-breaching landlord met its duty to mitigate by actively vetting prospects and trying to sublease the property in question.  Here, the dissent felt that the landlord unreasonably refused to entertain a sublease or new lease with any of the three businesses introduced by the defendant.

Afterwords:

There is a legally significant difference between an offer to sublease and an actual sublease.  A defaulting tenant has the burden of proving that its subtenant is ready, willing and able to assume the tenancy.  If all the tenant brings to a landlord is an offer or a proposal, this won’t trigger the landlord’s obligation not to unreasonably refuse consent to a commercially viable subtenant.

A landlord who fails to promptly try to re-let empty property or who doesn’t take an offered subtenant seriously, risks a finding that it failed to meet its duty to mitigate its damages after a prime tenant defaults.

 

Procuring Cause Real Estate Broker Entitled to Quantum Meruit Commission – IL First Dist.

Halpern v. Titan Commercial, LLC, 2016 IL App (1st) 152129 examines commercial broker’s liens, the procuring cause doctrine and the quantum meruit remedy under Illinois law.

The Plaintiff property buyer sued to remove the defendant’s real estate broker’s lien after plaintiff bought Chicago commercial property from an owner introduced by the broker a few years prior.  Over a two-year span, the broker tried to facilitate plaintiff’s purchase the property by arranging multiple meetings and showings of the site.  The plaintiff ultimately bought the property through a consultant instead of the broker defendant. 

The plaintiff sued to stop the broker from foreclosing its broker’s lien and to quiet title to the parcel.  After the court entered a preliminary injunction for the plaintiff, the broker counterclaimed for breach of contract and quantum meruit.  After a bench trial, the broker was awarded $50,000 on its quantum meruit claim and Plaintiff appealed.

Result: Judgment for broker affirmed.

Rules/reasoning:

The court first upheld the trial court’s denial of the plaintiff’s claims for attorneys’ fees against the broker based on  Section 10(l) of the Commercial Broker’s Lien Act, 770 ILCS 15/1, et seq. (the “Act”).  This Act section provides that a prevailing party can recover its costs and attorneys’ fees.  A prevailing party is one who obtains “some sort of affirmative relief after [trial] on the merits.”

The appeals court held that the plaintiff wasn’t a prevailing party under the Act simply by obtaining a preliminary injunction.  Since the preliminary injunction is, by definition, a temporary (and preliminary) ruling, there was no final disposition of the validity of the defendant’s broker’s lien.

The court then focused on the procuring cause doctrine and related quantum meruit remedy.  Under the procuring cause rule, where a broker’s efforts ultimately result in a sale of property – even if consummated through a different broker – the first broker is the procuring cause and can recover a reasonable commission.

A broker is the procuring cause where he brings a buyer and seller together or is instrumental in the sale’s completion based on the broker’s negotiations or information it supplies. (¶ 18)

A procuring cause broker is entitled to a commission under a quantum meruit theory where a party receives a benefit from the broker’s services that is unjust for that party to retain – even where there’s no express contract between the parties.

Here, the plaintiff only knew of this off-market property based on defendant showing it to her and introducing her to the property owner.  Had it not been for defendant’s actions, plaintiff would have never known about the property.

What About Broker Abandonment?

A defense to a procuring cause claim is where a broker abandons a deal.  To demonstrate broker abandonment, a purchaser must offer evidence of the broker’s discontinuing its services but also the purchaser’s own abandonment of its intent to buy the property.

Here, neither the purchaser nor the broker exhibited an intention to abandon the deal.  The purchaser eventually bought the property and the broker continued trying to arrange plaintiff’s purchase for two-plus years.

The court credited the broker’s evidence as to a reasonable commission based on the property’s $4.2M sale price.  Two experts testified for the broker that a reasonable commission would be between 1% and 6%.  The trial court’s $50,000 award fell well within that range. (¶¶ 22-24)

Afterwords:

1/ Where a broker introduces a plaintiff to property she ultimately buys or the broker’s information is integral to the plaintiff’s eventual purchase, the broker can recover a reasonable commission even where plaintiff uses another broker (or buys it herself). 

2/ Quantum meruit provides a valuable fall-back remedy where there is no express contract between a broker and a buyer.  The broker can recover a reasonable commission (based on expert testimony, probably) so long as it proves the buyer derived a benefit from the broker’s pre-purchase services.

 

Business Lender States Fraud Claim Versus Corporation But Not Civil Conspiracy One in Loan Default Case – IL 1st Dist.

When a corporate defendant and its key officers allegedly made a slew of verbal and written misstatements concerning the corporation’s financial health to encourage a business loan, the plaintiff lender filed fraud and civil conspiracy claims against various defendants.  Ickert v. Cougar Package Designers, Inc., 2017 IL App (1st) 151975-U examines the level of specificity required of fraud and conspiracy plaintiffs under Illinois pleading rules.

The plaintiff alleged that corporate officers falsely inflated both the company’s current assets and others in the pipeline to induce plaintiff’s $200,000 loan to the company.  When the company failed to repay the loan, the plaintiff brought fraud and conspiracy claims – the latter based on the theory that the corporate agents conspired to lie about the company’s financial status to entice plaintiff’s loan.

The trial court granted the defendants’ motion to dismiss the fraud and conspiracy claims and the plaintiff appealed.

Partially reversing the trial court, the First District first focused on the pleading elements of common law fraud and the Illinois Code provision (735 ILCS 5/2-606) that requires operative papers to be attached to pleadings that are based on those papers.

Code Section 2-606 states that if a claim or defense is based on a written instrument, a copy of the writing must be attached to the pleading as an exhibit.  However, not every relevant document that a party seeks to introduce as an exhibit at trial must be attached to a pleading.

Here, while part of plaintiff’s fraud claim was predicated on a faulty written financial disclosure document, much of the claim centered on the defendants’ verbal misrepresentations.  As a consequence, the Court found that the plaintiff wasn’t required to attach the written financial disclosure to its complaint.

Sustaining the plaintiff’s fraud count against the corporate officer defendants (and reversing the trial court), the Court noted recited Illinois’ familiar fraud pleading elements: (1) a false statement of material fact, (2) knowledge or belief that the statement was false, (3) an intention to induce the plaintiff to act, (4) reasonable reliance on the truth of the challenged statement, and (5) damage to the plaintiff resulting from the reliance.

While silence normally won’t equal fraud, when silence is accompanied by deceptive conduct or suppression of a material fact, this is active concealment and the party concealing given facts is then under a duty to speak.

Fraud requires acute pleading specificity: the plaintiff must allege the who, what, where, and when of the misrepresentation.  Since the plaintiff pled the specific dates and content of various false statements, the plaintiff sufficiently alleged fraud against the corporate officers.

(¶¶ 22-26)

A valid civil conspiracy claim requires the plaintiff to allege (1) an agreement by two or more persons or entities to accomplish by concerted action either an unlawful purpose or a lawful purpose by unlawful means; (2) a tortious act committed in furtherance of that agreement; and (3) an injury caused by the defendant.  The agreement is the central conspiracy element.  The plaintiff must show more than a defendant had “mere knowledge” of fraudulent or illegal actions.  Without a specific agreement to take illegal actions, the conspiracy claim falls.

In the corporate context, a civil conspiracy claim cannot exist between a corporation’s own officers or employees.  This is because corporations can only act through their agents and any acts taken by a corporate employee is imputed to the corporation.

So, for example, if employees 1 and 2 agree to defraud plaintiff, there is no conspiracy since the employees are acting on behalf of the corporation – they are not “two or more persons.”  Since this case’s plaintiff pled the two conspiracy defendants were officers of the same corporate defendant, the trial court properly dismissed the conspiracy count. (¶¶ 29-30)

The appeals court also affirmed the trial court’s denial of the plaintiff’s motion to amend his complaint against the corporate defendant.  While the right to amend pleadings is liberally granted by Illinois courts, the right is not absolute.

In deciding whether to allow a plaintiff to amend pleadings, a court considers (1) whether the amendment would cure a defect in the pleadings, (2) whether the other party would be prejudiced or surprised by the proposed amendment, (3) whether the proposed amendment is timely, and (4) whether there were previous opportunities to amend.

Here, since the plaintiff failed multiple opportunities to make his fraud and conspiracy claims stick, the First District held that the trial court properly denied the plaintiff’s fourth attempt to amend his complaint.

Afterwords:

This case provides a useful summary of fraud’s heightened pleading elements under Illinois law.  It also solidifies the proposition that a defendant can’t conspire with itself: a there can be no corporation-corporate officer conspiracy.  They are viewed as one and the same in the context of a civil conspiracy claim.

The case’s procedural lesson is that while parties normally are given wide latitude to amend their pleadings, a motion to amend will be denied where a litigant has had and failed multiple chances to state a viable claim.