Fraud in the Execution Dooms Plaintiff’s Specific Performance Claim Against Business Partner

In Chamanara v. Djahanguiri, 2013 IL App (1st) 122885-U, the First District discussed the contours of the fraud in the execution defense in a specific performance suit to enforce a stock purchase agreement.

Facts:  The case involves two adjacent Chicago commercial properties located at 1206 N. State (“1206 Space”) and 1212 N. State St. (“1212 Space”).  Plaintiff rented the 1206 Space from defendant for several years and operated various restaurants on it.

The plaintiff sued to enforce a convoluted agreement involving the two spaces. The agreement called for the parties to become 50/50 shareholders in defendant’s property management firm and share rent proceeds for both the 1206 and 1212 Spaces.  The relationship crumbled and the plaintiff sued to enforce the agreement.  Defendant raised the fraud in the execution defense; saying he never agreed to partner with the plaintiff on the 1212 Space. After a bench trial, the Circuit Court found for defendant and plaintiff appealed.

Held: Affirmed. Defendant proved by clear and convincing evidence that he was tricked into signing the agreement.

Rules/reasoning:

Central to the Court’s fraud in the execution finding was the evidence that plaintiff “surreptitiously substituted” the 1212 Space agreement for the 1206 Space agreement (which defendant intended to sign).  This resulted in the defendant unwittingly signing away a 50% interest in both the 1206 and 1212 Space’s future rental stream.

The Court espoused the following key fraud in the execution principles:

(i) fraud in the execution is an exception to the general rule that one who has ample opportunity to read a document can’t later claim he was deceived as to a document’s meaning or content;

(ii) the party claiming fraud in the execution must prove the defense by clear and convincing evidence (a higher burden than the more-likely-than-not preponderance standard); 

(iii) fraud in the execution applies where the instrument is misread to the party signing it,

(iv) where there is surreptitious substitution of one paper for another or where (as here) a party is tricked into signing a document he didn’t mean to sign.

(¶¶ 74-75).

The First District agreed with the trial court that this was classic fraud in the execution.  The defendant’s unchallenged fraud in the execution evidence at trial included (a) testimony from multiple witnesses that the parties’ never came to agreement on the 50/50 partnership; and (b) the suspicious circumstances surrounding defendant’s execution of the 1212 Space agreement – namely, that plaintiff immediately snatched the papers away from defendant after he signed them, precluding defendant from a meaningful opportunity to see what he was signing. (¶¶ 76-81).

And since the plaintiff failed to counter defendant’s evidence at trial, the First District agreed with the trial court and found that defendant met his burden of proving that plaintiff tricked him into signing the stock purchase agreement for the 1212 Space.

Take-aways: Fraud in the execution requires an elevated proof burden burden.  In Chamanara, the defendant offered both testimonial (from multiple sources) and documentary evidence to support his claim that plaintiff hoodwinked him into signing away a 50% interest in his leasing company.  The plaintiff’s inability to counter this evidence made it impossible for him to defeat defendant’s fraud defense.  The case also illustrates a court’s willingness to look into the minute details (i.e., the court discussed at length how plaintiff only showed the documents upside down on his coffee table to defendant at the moment of signing) of circumstances surrounding a document’s execution in order to fully inform its fraud analysis.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.