Lender’s Reliance on Predecessor Bank’s Loan Documents Satisfies Business Records Hearsay Rule – IL First Dist.

A commercial guaranty dispute provides the background for the First District’s recent discussion of some signature litigation issues including the voluntary (versus compulsory) payment rule and how that impacts an appeal, the business records hearsay exception, and governing standards for the recovery of attorneys fees.

The lender plaintiff in Northbrook Bank & Trust Co. v. Abbas, 2018 IL App (1st) 162972 sued commercial loan guarantors for about $2M after a loan default involving four properties.
On appeal, the lender argued that the guarantors’ appeal was moot since they paid the judgment. Under the mootness doctrine, courts will not review cases simply to establish precedent or guide future litigation. This rule ensures that an actual controversy exists and that a court can grant effective relief.

A debtor’s voluntary payment of a money judgment prevents the paying party from pursuing an appeal. Compulsory payment, however, will not moot an appeal.
The court found the guarantors’ payment compulsory in view of the lender’s aggressive post-judgment efforts including issuing multiple citations and a wage garnishment and moving to compel the guarantors’ production of documents in the citation proceeding. Faced with these post-judgment maneuvers, the Court found the payment compulsory and refused to void the appeal. (⁋⁋ 24-27)

The First District then affirmed the trial court’s admission of the lender’s business records into evidence over the defendant’s hearsay objection.  To admit business records into evidence, the proponent (here, the plaintiff) must lay a proper foundation by showing the records were made (1) in the regular course of business, and (2) at or near the time of the event or occurrence. Illinois Rule of Evidence 803(6) allows “records of regularly conducted activity” into evidence where (I) a record is made at or near the time, (ii) by or from information transmitted by a person with knowledge, (iii) if kept in the regular course of business and (iv) where it was the regular practice of that business activity to make the record as shown by the custodian’s or other qualified witness’s testimony.

The theory on which business records are generally admissible is that their purpose is to aid in the proper transaction of business and the records are useless unless accurate. Because the accuracy of business records is vital to any functioning commercial enterprise, “the motive for following a routine of accuracy is great and motive to falsify nonexistent.” [¶¶ 47-48]

With computer-generated business records, the evidence’s proponent must establish (i) the equipment used is industry standard, (ii) the entries were made in the regular course of business, (iii) at or near the time of the transaction, and (iv) the sources of information, method and time of preparation indicate the entries’ trustworthiness. Significantly, the person offering the business records into evidence (either at trial or via affidavit) isn’t required to have personally entered the data into the computer or even learn of the records before the litigation started. A witness’s lack of personal knowledge concerning the creation of business records affects the weight of the evidence; not its admissibility. [¶ 50]

Here, the plaintiff’s loan officer testified he oversaw defendants’ account, that he personally reviewed the entire loan history as part of his job duties and authenticated copies of the subject loan records. In its totality, the Court viewed the bank officer’s testimony as sufficient to admit the loan records into evidence.

Next, the Court affirmed the trial court’s award of attorneys’ fees to the lender plaintiff. Illinois follows the ‘American rule’: each party pays its own fees unless there is a contract or statutory provision providing for fee-shifting. If contractual fee language is unambiguous, the Court will enforce it as written.

A trial court’s attorneys’ fee award must be reasonable based on, among other things, (i) the nature and complexity of the case, (ii) an attorney’s skill and standing, (iii) degree of responsibility required, (iv) customary attorney charges in the locale of the petitioning party, and (v) nexus between litigation and fees charged. As long as the petitioner presents a detailed breakdown of fees and expenses, the opponent has a chance to present counter-evidence, and the court can make a reasonableness determination, an evidentiary hearing isn’t required.

Afterwords:

Abbas presents a useful, straightforward summary of the business records hearsay exception, attorneys’ fees standards and how payment of a judgment impacts a later right to appeal that judgment.

The case also illustrates how vital getting documents into evidence in breach of contract cases and the paramount importance of clear prevailing party fee provisions in written agreements.

 

Shortened ‘Arb Award’ Rejection Deadline Upheld Against Constitutional Attack – IL Appeals Court

The First District appeals court recently nixed a plaintiff’s constitutional challenge to a local rule’s arbitration rejection deadline.  The opinion’s upshot is clear: when a supreme court rule conflicts with a statute, the rule wins.

The plaintiff in McBreen v. Mercedes-Benz, USA, LLC  argued her equal protection and due process rights were violated when a trial court denied her attempt to tardily reject an arbitration award. The case was decided by a single arbitrator under the auspices of the Cook County Law Division Mandatory Arbitration Program (MAP), a two-year pilot program that sends commercial cases with damage claims between $50,000 and $75,00 to mandatory arbitration.

Among other things, the Law Division MAP provides for hearings before a single arbitrator and requires a losing party to reject the award within seven business days. Cook County Cir. Ct. R. 25.1, 25.5, 25.11.

After an arbitrator found for defendants, the plaintiff didn’t reject the award until 30 days later – 23 days too late. The trial court then granted defendant’s motion to dismiss plaintiff’s case and denied plaintiff’s motion to void the arbitration award or extend the rejection deadline.  The trial court entered judgment on the arbitration award for defendant.

Plaintiff argued on appeal that Rule 25’s compressed rejection period violated her constitutional rights since it conflicted with the  30-day rejection deadline for Municipal Department arbitrations. (The Cook County Municipal Department hears personal injury cases and breach of contract suits where the damage claim is $30,000 or less.)   The plaintiff also claimed the Law Division MAP was unconstitutional since it clashed with the “panel of three” arbitrators rule prevailing in Municipal Department arbitrations.

Affirming the trial court, the Court first considered whether the Illinois Supreme Court had power to establish the Law Division MAP program with its seven-day rejection rule.

The Law Division MAP rejection period conflicts with Cook County’s Municipal Department arbitration scheme – which has a 30-day rejection rule.  (The Municipal arbitration rules, codified in Supreme Court Rules 86-95, were legislatively implemented via Code Sections 2-1001A and 1003A which, respectively, authorize the establishment of an arbitration program where a panel of three arbitrators hears cases involving less than $50,000 in damages. Rule 93(a) contains the 30-day rejection cut-off.)

The First District noted that while the Law Division MAP’s seven-day rejection period clashes with the Municipal Department’s 30-day period, Illinois courts through the decades consistently recognize the Illinois Supreme Court’s constitutional authority to make rules governing practice and procedure in the lower courts and that where a supreme court rule conflicts with a statute on a judicial procedure matter, the rule wins.

The court also notes the Illinois legislature echoed this inherent power for the Supreme Court to establish court rules in Code Section 1-104(a).  In the end, the Court found that In view of the Illinois Supreme Court’s expansive power in the area of pleadings, practice and procedure, the Law Division MAP’s abbreviated rejection period trumped any conflicting, longer rejection period found in other statutes or rules.  (¶¶ 17-18, 22-23).

The Court also rejected plaintiff’s equal protection argument – that the Law Division MAP program infringed the rights of Municipal court participants by shortening the rejection time span from 30 to seven days.  While allowing that Law Division and Municipal litigants in the arbitration setting share the same objective of taking part in a less-costly alternative to litigation, the Court found the two Programs “qualitatively different:” the Law Division MAP is geared to those seeking damages of between $50,000 and $75,000 while the Municipal plaintiff’s damages are capped at $30,000.

According to the Court, the different damage ceilings involved in Law Division and Municipal cases meant that plaintiffs in the two court systems aren’t similarly situated under the Equal Protection clause. (¶¶ 34-35).

Plaintiff’s final argument, that the Law Division MAP’s seven-day rejection period violated her due process rights also failed.  Due process requires an opportunity to be heard at a meaningful time and in a meaningful matter.

The plaintiff argued that the Law Division MAP’s seven-day rejection cut-off failed to give her a meaningful opportunity to challenge the award.   The Court thought otherwise.  It noted that statutes are presumed constitutional and someone challenging a statute’s constitutionality bears a heavy burden.  It then cited to multiple cases across a wide strata of facts which have upheld time limits of less than 30 days.

Afterwords:

McBreen offers a thorough, triangulated analysis of what happens when a Supreme Court Rule, a county’s local court rule and legislative enactments all speak to the same issue and appear to contradict each other.  The case solidifies the proposition that the Supreme Court’s primacy in the realm of lower court procedure and pleading extends to mandatory arbitration regimes, too.  While the case is silent on what constitutes a sufficient basis to extend the Law Division MAP’s seven-day rejection deadline, McBreen makes clear that a constitutional challenge will likely ring hollow.

 

Appeals Court Gives Teeth to “Good Faith” Requirement of Accord and Satisfaction Defense

A common cautionary tale recounted in 1L contracts classes involves the crafty debtor who secretly short-pays a creditor but notes “payment in full” on his check. According to the classic “gotcha” vignette, the debtor’s devious conduct forever bars the unwitting creditor from suing the debtor.

Whether apocryphal or not (like the one about the newly minted lawyer who accidentally brought a marijuana cigarette into the courthouse and forever lost his license after less than 3 hours of practice) the fact pattern neatly illustrates the accord and satisfaction rue. Accord and satisfaction applies where a creditor and debtor have a legitimate dispute over amounts owed on a note (or other payment document) and the parties agree on an amount (the “accord”) the debtor can pay (the “satisfaction”) to resolve the disputed claim.

Piney Ridge Associates v. Ellington, 2017 IL App (3d) 160764-U reads like a first year contracts “hypo” come to life as it reflects the perils of creditor’s accepting partial payments where the payor recites “payment in full” on a check.

Piney Ridge’s plaintiff note buyer sued the defendant for defaulting on a 1993 promissory note. The defendant moved to dismiss because he wrote “payment in full” under the check endorsement line. The trial court agreed with the defendant that plaintiff’s acceptance of the check was an accord and satisfaction that defeated plaintiff’s suit.

The 3rd District appeals court reversed; it stressed that a debtor’s duplicitous conduct won’t support an accord and satisfaction defense.

Under Illinois law, an accord and satisfaction is a contractual method of discharging a debt: the accord is the parties’ agreement; the satisfaction is the execution of the agreement.

In deciding whether a transaction amounts to an accord and satisfaction, the court focuses on the parties’ intent.

Article 3 of the Uniform Commercial Code (which applies to negotiable instruments) a debtor who relies on the accord and satisfaction defense must prove (1) he/she tendered payment in good faith as full satisfaction of a claim, (2) the amount of the claim was unliquidated or subject to a bona fide dispute; and (3) the claimant obtained payment from the debtor. 810 ILCS 5/3-311(a).

Good faith means honesty in fact and observing “reasonable commercial standards of fair dealing.” The debtor must also provide the creditor with a conspicuous statement that the debtor’s payment is tendered in full satisfaction of a claim. (⁋12)(810 ILCS 5/3-311(a), (b)). Without an honest dispute, there is no accord and satisfaction. (⁋ 14)

A debtor who fails to act in good faith cannot bind a creditor to an accord and satisfaction. Case examples of a court refusing to find an accord and satisfaction include defendants who, despite clearly marking their payment as “in full”, paid less than 10% of a workers’ compensation lien in one case, and in another, paid less than half the plaintiff’s total invoice amount and lied to the plaintiff’s agent about past payments. (⁋⁋ 13, 14)(citing to Fremarek v. John Hancock Mutual Life Ins. Co., 272 Ill.App.3d 1067 (1995); and McMahon Food Corp. v. Burger Dairy Co., 103 F.3d 1307 (7th Cir. 1996).

Applying this good faith requirement, the Court noted that the defendant paid $354 to the plaintiff at the time the defendant admittedly owed over $10,000 (defendant sent a pre-suit letter to the prior noteholder conceding he owed $10,000 on the note). The Court held that this approximately $7,600 shortfall clearly did not meet accord and satisfaction’s good faith component.

Bullet-points:

  • Accord and satisfaction requires good faith on the payor’s part and a court won’t validate debtor subterfuge.
  • Where the amount paid “in full” is dwarfed by the uncontested claim amount, the Court won’t find an accord and satisfaction.
  • Where there is no legitimate dispute concerning a debt’s existence and amount, there can be no accord and satisfaction.