Lost Profits and Breach of Contract Damages: Illinois Law

imageIn Santorini Cab Corporation v. Banco Popular, 2013 IL App (1st) 122070, the plaintiff cab company sued a bank for breaching two contracts to transfer taxicab medallions totalling $96,000 ($48,000 each).  The plaintiff sought damages for lost profits (profits it would have earned had the bank transferred the medallions) and the increased value of the medallions as of the trial date.

After a bench trial, the court entered judgment for the cab company but in an amount (about $40,000) much lower than the company sought.  The trial court previously entered partial summary judgment for the bank and excluded plaintiff’s lost profits evidence as a discovery sanction.  The court also ruled that the proper measure of plaintiff’s damages was the difference between the medallions’ contract price and their value on the date of breach (2007); not on the trial date (2011).  The cab company appealed.

Holding: Trial court affirmed.

Reasons: The trial court properly barred the plaintiff from offering lost profits evidence.  The Court noted that plaintiff repeatedly failed to respond to defendant’s discovery requests for information to support plaintiff’s claimed damages.

Lost Profits Standards and Discovery Sanctions

Under Illinois law, lost profits can be awarded as long as there is a sufficient basis to estimate them with  reasonable certainty.  Lost profits won’t be awarded where the proof is remote or speculative.  (¶¶ 18-19).  The plaintiff has the burden of proving lost profits by presenting a reasonable basis for their computation.  A common source of lost profits evidence is a plaintiff’s track record of past profits as a gauge of what future profits would have been (if there was no breach of contract).

Here, the plaintiff didn’t meet its burden of proving lost profits.  Since the plaintiff failed to comply with defendant’s lost profits discovery on multiple occasions, the trial court properly struck plaintiff’s damage claims as a discovery sanction under Supreme Court Rule 219.

Rule 219 gives the trial court wide latitude to impose discovery sanctions, including barring a non-complying party from offering evidence on issues sought by the ignored discovery requests.  (¶¶ 21-22).

Contract Damages – From When to When?

The Court also affirmed the trial court’s damage award of $37,550 which consisted of the difference in the (a) contract price of each medallion ($48,000) and (b) the medallion’s value on the date of breach ($66,775).

Breach of contract damages seek to put the plaintiff in the position he would have been in had the contract been performed, but not in a better position.  Contract damages should not provide plaintiff with a windfall.  (¶ 26).

In a personal property case, the measure of damages is the difference between the contract price and the market price of the item at the time of breach.  ¶ 27. But where there is no market for the item, this rule doesn’t apply.  Instead, the damage amount is “actual loss” to the buyer as shown by the  evidence.  (¶¶ 26-27).

Here, there was a definite market for cab medallions.  The evidence was that there were thousands of cab medallions bought and sold over a 3 1/2 year period preceding the trial date and several medallions were sold the month of the bank’s breach.  The Court found that the trial court properly averaged the sale price of medallions sold in Chicago during the month and year of breach (Feb. 2007) and sustained the lower court’s damage award for the plaintiff.

Take-aways:

Santorini provides a nice gloss on contract damages and lost profits requirements in the personal property context.  It clarifies that contract damages involving personal property  are measured on the date of breach; not a later trial date.  This case also shows how crucial it is to timely and properly answer discovery requests on damages issues; especially if you have the burden of proof at trial.

It’s crucial for parties to vigilantly update discovery responses – especially on damage computations – so they aren’t barred from offering damages evidence at trial.

Law Firm’s Negligence Suit Against Bank Defeated By Account Agreement and UCC Article 4 (IL Law))

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In July 2013, the Third District appeals court affirmed dismissal of a law firm’s (Firm) negligence suit against a bank that charged back the firm’s account after a $350,000 check deposited by the Firm turned out to be counterfeit.  Rejecting the Firm’s negligence claim, the Court found that the terms of the parties’ account agreement and the specific provisions of UCC Article  4 (governing banks’ check handling practices) trumped any common law duties owed by the bank.

In Dixon, Laukitis and Downing v. Busey Bank, 2013 IL App (3d) 120832, the plaintiff Firm deposited a $350,000 check into its account at defendant bank.  The bank provisionally credited the Firm’s account in the amount of the deposit.  But before the check was finally paid, the firm made multiple withdrawals of nearly $300,000.  A few days later, when the check turned out to be counterfeit, it was returned uncollectible and the bank charged back the Firm’s account.   The Firm sued, alleging the bank breached its duty of care by failing to recognize and alert the Firm of the suspicious check.  The trial court granted the bank’s motion to dismiss.

Held: Affirmed.  Firm’s negligence claim is defeated by the account holder agreement and UCC Article 4 provisions governing banking practices.

Rules/Reasons:

In dismissing the Firm’s negligence suit, the Court cited a slew of statutory and common law rules which govern both the relationship between a bank and a customer and a bank’s check handling practices.  The key rules relied on by the Court:

– The UCC governs the relationship between a bank and its customers and a bank’s general check handling duties;

– If a check doesn’t settle (isn’t paid), the collecting bank has a superior right (to the owner) to a setoff of the unpaid check;

– UCC section 4-202 delineates a bank’s duties with respect to processing a check including presenting it, sending notice of dishonor or nonpayment, timely settling it and notifying a bank customer of any loss or delay within a reasonable time.  UCC 4-202(a), (b)

– If a bank makes provisional settlement of a check but doesn’t receive final payment, the bank can charge back the customer’s account.  UCC 4-214(a);

– A private agreement between a bank and its customer is valid as long as the terms aren’t manifestly unreasonable. UCC 4-103(a);

– The risk of loss of a check not settling is on the depositor until final settlement.  UCC 2-214(a)

– The relationship between a bank and its account holder is contractual in nature and one of creditor (bank) and debtor (account holder);

– An account holder agreement between a bank and its customer creates a binding contract;

– A collecting bank owes no duty to its customer to inspect a check that is later determined to be counterfeit or to remind its customer that it bears the risk of loss before a deposited check is finally settled

¶¶10-13, 18-19.

Applying these rules in the bank’s favor, the Court noted that the bank’s supporting affidavit contained testimony that there was nothing unusual that led the bank to question the check’s legitimacy and that the bank promptly informed the Firm when the check was returned unpaid.  Since the Firm failed to challenge the bank’s affidavit, and also cited no Article 4 duties or obligations to the account holder that the bank breached, the Firm’s negligence claim failed.  (¶¶ 18-19)

The Court also dismissed the Firm’s negligence claim based on the economic loss rule.  The parties’ relationship was based on a written contract (the account agreement) and the Firm sought to recover economic loss: namely, the $350,000 charge back from the fraudulent check.  The existence of a contract between the parties spelled defeat for the Firm’s negligence suit.

Take-aways: To sue a bank and win is difficult.  The UCC and common law provide an array of  steep standards a plaintiff must surmount and defenses for a bank that is sued by a customer for negligence.  A bank-customer account agreement and the provisions of UCC Articles 3 (negotiable instruments) and 4 (depository and collecting banks) will control over any common law duties owed to an account holder.

In hindsight, the Firm maybe should have premised its claims on specific violations of UCC Article 4 instead of general negligence allegations and also should have filed a counter-affidavit or other evidence to contest the bank officer’s statements.