Set-off Is Counterclaim; Not Affirmative Defense – IL Court Rules in Partition Suit

Stadnyk v. Nedoshytko, 2017 IL App (1st) 152103-U views the counterclaim-versus-affirmative defense distinction through the prism of a statutory partition suit involving co-owners of a Chicago apartment building.

The plaintiff sued to declare the parties’ respective ownership rights in the subject property.  After the court issued a partition order finding the plaintiff and defendants had respective 7/8 and 1/8 ownership interests.  After the trial court ordered a partition of the property, the defendants filed affirmative defenses titled unjust enrichment, breach of fiduciary duty and equitable accounting.  Through all the “defenses” defendants sought to recoup property maintenance and repair expenses they made through the years.

The trial court struck defendants’ affirmative defenses on the basis that they were actually counterclaims and not defenses. The court also refused to award statutory attorneys’ fees to the plaintiff.  Each side appealed.

Affirming the trial court’s striking of the defendants’ affirmative defenses, the First District initially considered the difference between an affirmative defense and a counterclaim.

Code Section 2-608 provides that counterclaims in the nature of “setoff, recoupment, cross-claim or otherwise, and whether in tort or contract, for liquidated or unliquidated damages, or for other relief, may be pleaded as a cross claim in any action, and when so pleaded shall be called a counterclaim.” 735 ILCS 5/2-608

Code Section 2-613 governs affirmative defenses and requires the pleader to allege facts supporting a given defense and gives as examples, payment, release, satisfaction, discharge, license, fraud, duress, estoppel, laches, statute of frauds, illegality, contributory negligence, want or failure of consideration. 735 ILCS 5/2-613.

Counterclaims differ from affirmative defenses in that counterclaims seek affirmative relief while affirmative defenses simply seek to defeat a plaintiff’s cause of action.  In this case, the defendants’ did not seek to defeat plaintiff’s partition suit.  Instead, the defendants sought post-partition set-offs against sale proceeds going to plaintiff for defendants’ property maintenance and repair expenses.

A setoff is a counterclaim filed by a defendant on a transaction extrinsic to the subject of plaintiff’s suit.  Since the defendants styled their affirmative defenses as sounding in setoff and accounting – two causes of action (not defenses) – the Court affirmed the trial court’s striking the defenses.

The Court also reversed the trial court’s order refusing to apportion plaintiff’s attorneys fees.  Section 17-125 of the partition statute provides that a partition plaintiff’s attorney can recover his fees apportioned among the various parties since, in theory, the attorney acts for all interested parties.  However, where a party mounts a “good and substantial defense to the complaint,” the plaintiff’s attorneys’ fees should not be spread among the litigants. 735 ILCS 5/17-125.

Here, the defendants attempted to raise defenses (setoff and public sale, as opposed to private, was required) but only after the trial court entered the partition order.  Since the defendants didn’t challenge plaintiff’s partition request but instead sought a setoff for defendants’ contributions to the property and a public sale of the property, the trial court correctly concluded the defendants failed to raise good and substantial defenses under the partition statute.  As a consequence, the trial court should have apportioned plaintiff’s attorneys’ fees.

Afterwords:

Stadnyk cements the proposition that a counterclaim differs from an affirmative defense and that setoff fits into the former category.  The case also stresses that where a defendant seeks to recover damages from a plaintiff based on a collateral transaction (other than the one underlying the plaintiff’s lawsuit), defendant should file a counterclaim for a setoff rather than attempt to raise the setoff as a defense.

Other critical holdings from the case include that a court of equity lacks power to go against clear statutory language that require a public sale and partition plaintiff attorneys’ fees should only be apportioned where a defendant doesn’t raise a substantial defense to the partition suit.

 

 

Tacking Unsigned Change Orders On To Contractors’ Lien Not Enough For Constructive Fraud – IL Court

Constructive mechanics lien fraud and slander of title are two central topics the appeals court grapples with in Roy Zenere Trucking & Excavating, Inc. v. Build Tech, Inc., 2016 IL App (3d) 140946.  There, a commercial properly developer appealed bench trial judgments for two subcontractor plaintiffs – a paving contractor and an excavating firm – on the basis that the plaintiffs’ mechanics liens were inflated and fraudulent.

The developer argued that since the subcontractors tried to augment the lien by adding unsigned change order work to it – and the contracts required all change orders to be in writing – this equaled that voided the liens.  The trial court disagreed and entered judgment for the plaintiff subcontractors.

Affirming the trial court’s judgment, the appeals court provides a useful summary of the type of proof needed to sustain constructive fraud and slander of title claims in the construction lien setting and when attorneys’ fees can be awarded to prevailing parties under Illinois’ mechanics lien statute, 770 ILCS 60/1 (the Act).

Section 7(a) of the Act provides that no lien shall be defeated to the proper amount due to an error of overcharging unless it is shown that the error or overcharge was made with an “intent to defraud.”  Constructive fraud (i.e., fraud that can’t be proven to be purposeful) can also invalidate a lien but there must be more than a simple overcharge in the lien claim.  The overage must be coupled with other evidence of fraud.

Slander of title applies where (1) a defendant makes a false and malicious publication, (2) the publication disparages the plaintiff’s title to property, and (3) damages.  “Malicious” in the slander of title context means knowingly false or that statements were made with a reckless disregard of their truth or falsity.  If a party has reasonable grounds to believe it has a legal or equitable claim to property, even if it’s later proven to be false, this won’t amount to a slander of title.

Here, the appeals court agreed with the trial court that there was no evidence to support a constructive fraud or slander of title claim.  The defendant property owner admitted that the subcontractor plaintiffs performed the contract as well as the extra change order work.

While the Court excluded the unsigned change order work from the lien amount, there was still insufficient constructive fraud or slander of title evidence to sustain the owner’s counterclaims.  Though unsuccessful in adding the change orders to the lien, the Court found the plaintiffs had a reasonable basis to recover the extra work in their lien foreclosure actions based on the parties’ contracting conduct where the owner routinely paid extras without signed change orders.

The Court then examined whether the subcontractors could add their attorneys’ fees to the judgment.  Section 17(b) of the Act allows a court to assess attorneys’ fees against a property owner who fails to pay “without just cause or right.”  This equates to an owner raising a defense not “well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.”  770 ILCS 60/17(b), (d).

The evidence at trial that the subcontractors substantially performed the paving and excavation work cut in favor of awarding fees to the plaintiffs.  There was no evidence to support the owner defendant’s failure to pay the subcontract amounts.  The Court held that this lack of a colorable basis not to pay the subcontractors was “without just cause or right” under the Act.

Afterwords:

1/ Constructive fraud requires more than a computational error in the lien amount.  There must be other “plus-factor” evidence that combines with the overcharge;

2/ Where a contractor has reasonable basis for lien claim, it will be impossible for plaintiff to meet the malicious publication requirement of a slander of title claim;

3/ This case is pro-contractor as it gives teeth to the Mechanics’ Lien Statute’s fee-shifting section.

 

 

Paralegal Fees Can Be Tacked On to Attorney Fees Sanctions Award – IL First Dist.

Aside from its trenchant discussion of the constructive fraud rule in mechanics lien litigation, the Illinois First District in Father & Sons Home Improvement II, Inc. v. Stuart, 2016 IL App (1st) 143666 clarified that a paralegal’s time and services can be added to a claim for attorneys’ fees as a sanction against a losing party who files false pleadings.

In an earlier post, I discussed how the lien claimant in this case lost its lien foreclosure suit for misstating the completion of work date and inflating the monetary value of work and materials it affixed to the subject site.  The property owner and a lender defendant filed a fee petition and sanctions motion, respectively.

Examining the lender’s motion for Rule 137 sanctions, the Court stated some black-letter rules that govern fee petitions:

  • Under Rule 137, a party can recover attorneys’ fees incurred as a result of a sanctionable pleading or paper (one filed without an objectively reasonable legal basis);
  • Typically, “overhead” expenses aren’t compensable in a fee motion.  The theory is that overhead costs are already built into an attorneys’ hourly rate;
  •   Overhead includes telephone charges, in-house delivery charges, photocopying, check processing, and in-house paralegal and secretarial services;
  • However, when a paralegal performs a specialized legal task that would normally be performed by an attorney, the paralegal’s fees are recoverable since those services would not be considered overhead.

The Court found that the lender’s paralegals performed myriad services that would normally be done by an attorney – namely, researching the title history of the subject property and preparing a memorandum summarizing the title history.  By contrast, a paralegal’s general administrative tasks were disallowed by the court and could not be sought in the sanctions motion.

Afterwords:

When preparing a fee petition, the prevailing party should also include paralegal time and services; especially if they involve researching real estate land records and summarizing a title history.  While the line separating legal services (which are recoverable) and administrative or overhead expenses (which aren’t) is blurry, Father & Sons stands for the proposition that a fee petition or Rule 137 sanctions motion can be augmented by paralegal fees where the paralegal performs specialized work that contains an element of legal analysis.