The ‘Justifiable Reliance’ Element Of A Fraud Claim (Illinois Law)

In Siegel Development, LLC v. Peak Construction, LLC, 2013 IL App (1st) 11973, the First District affirmed summary judgment in favor of a building seller and contractor in the building buyers’ fraud suit.

Facts: The building buyers (plaintiffs) and defendants entered into a contract for the purchase of a four-unit apartment building that plaintiffs planned to convert to condominiums.  Plaintiffs forecasted spending about $700,000 to buy the building and then another $180K in renovation costs.  The renovation figure was based on a spreadsheet provided by the defendant contractor which outlined the projected costs.  The contractor also informed the plaintiffs that it could perform all renovation work under a limited repair-and-replacement permit from the City.

Before closing, an architect repeatedly told the plaintiffs that the building needed more extensive repairs than were estimated by the contractor and that plaintiffs would need a “full permit” (as opposed to repair-and-replacement one) to complete the repairs.  Plaintiffs ignored the architect’s suggestion and  proceeded to closing without securing a full permit and also opted against a pre-closing property inspection.

After plaintiffs bought the building, the contractor informed them that it couldn’t proceed with the spreadsheet repairs and  couldn’t perform the work under a repair and replacement permit.  Plaintiffs also discovered numerous structural defects in the building which required repair costs far exceeding the contractor’s spreadsheet estimates.  Plaintiff sued the seller and contractor (and its agents) for fraud, rescission and breach of contract.

Trial court and appeals court holdings: The trial court entered summary judgment for the defendants.

Reasoning:

Plaintiffs failed to raise a genuine issue of fact on whether defendants made an actionable misrepresentation to plaintiffs concerning the building and failed to show justifiable reliance on any of defendants’ building representations.

Illinois law requires a fraud plaintiff to establish (1) a misrepresentation or false statement of material fact; (2) by one who knows or believes the statement to be false; (3) made with the intent to induce action by another in reliance on the statement, (4) action by the other in reliance on the truthfulness of the statement; and (5) injury resulting from the reliance.  ¶ 111

Plaintiffs’ misrepresentation claim was premised on the contractor’s spreadsheet document that estimated building repairs at about $180K.  The Court found the document too indefinite to bind the defendants since there was no meeting of the minds on the project specifics and scope of work. 

The Court also affirmed the trial court’s finding of no justifiable reliance as a matter of law.  Fraud reliance must be reasonable.  To determine whether reliance is reasonable, the Court considers all facts known to the plaintiff and all facts which the plaintiff could have learned through the exercise of ordinary prudence. A fraud plaintiff cannot enter a transaction “with his eyes closed” and later claim he was deceived.  But where a representation concerns a fact that is uniquely within the speaker’s knowledge, the recipient can rely upon it without investigation.  ¶ 114

In finding no justified reliance as a matter of law, the First District cited record evidence that plaintiffs decided to purchase the property without a signed repair contract or a pre-closing inspection.  ¶ 114.

The Court also found that the sales contract’s written warranty prevented the plaintiff from claiming it relied on the defendants’ oral statements about the building’s structueral integrity.  Note: the opinion references that plaintiff’s breach of warranty claim against the seller remains pending and was not subject of the appeal.

Take-aways: Peak Construction illustrates how difficult it is for a plaintiff to prove fraud; especially where the plaintiff is a sophisticated business person or entity.  The case also shows that proving justifiable reliance is particularly hard where the plaintiff and defendant are on an equal bargaining footing and the plaintiff has an ample opportunity to investigate the truth of a supposedly false statement. 

 

 

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PaulP

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