Tag: condominium

Condo Buyer’s Illness Not Enough to Make Closing ‘Impossible’ – IL First District

An Illinois appeals court recently followed case precedent and narrowly construed the impossibility of performance and commercial frustration defenses in a failed real estate deal.

The parties in Ury v. DiBari, 2016 IL App (1st) 150277-U contracted for the sale and purchase of a (Chicago) Gold Coast condominium.  The contract called for a $55K earnest money payment and provided that the seller’s sole remedy in the event of buyer breach was retention of the buyer’s earnest money.

The seller sued when the buyer failed to close.  The buyer filed defenses saying it was impossible and commercially impractical for him to consummate the purchase due to a sudden serious illness he suffered right before the scheduled closing.  The Court rejected the defenses and entered summary judgment for the seller.  In doing so, the Court provides guidance on the nature and scope of the impossibility of performance and commercial frustration doctrines.

In the context of contract enforcement, parties generally must adhere to the negotiated contract terms.  Subsequent events – especially ones that are foreseeable – not provided for do not invalidate a contract.  The legal impossibility doctrine operates as an exception to the rule that holds parties to their contract obligations.

Legal impossibility applies where the continued existence of a particular person or thing is so necessary to the performance of the contract, it is viewed as an implied condition of the contract.  Death (of the person) or destruction (of the thing) excuses the other party’s performance.

The impossibility defense is applied sparingly and requires that a party’s performance be objectively impossible; not a subjective inconvenience or hardship.  Objective impossibility equates to “this can’t be done” while subjective impossibility is personal (“I cannot do this”) to the promisor.  A successful impossibility defense also requires the party to show it ” tried all practical alternatives available to permit performance.” (¶¶ 21-24, 29)

The defendant’s illness failed the law’s stringent test for objective impossibility.  His sickness was unique to him and therefore made closing only subjectively impossible.  The court pointed out that the condominium property was not destroyed and was still capable of being sold.

Another factor the court considered in rejecting the impossibility defense was that the defendant never tried to extend the closing date or sought accommodation for his illness.

The Court also discarded the defendant’s commercial frustration defense.  A party asserting commercial frustration must show that its performance under a contract is rendered meaningless due to an unforeseen change in circumstances.  Specifically, the commercially frustrated party has to demonstrate (1) the frustrating event was not reasonably foreseeable, and (2) the value of the party’s performance is totally destroyed by the frustrating cause.

Like with the failed impossibility defense, the claimed frustrating event – the buyer’s sickness – was foreseeable and did not destroy the subject matter of the contract.  Since the defendant’s weakened condition did not make the property worthless, there was no unforeseen frustrating event to give color to the buyer’s defense.

Afterwords:

1/ Impossibility of performance and commercial frustration are valid defenses but only in limited circumstances;

2/ Objective impossibility (“this can’t be done”) can relieve a party from contractual performance while subjective impossibility (“I can’t do this”) will not;

3/ Commercial frustration generally requires the contract’s subject matter be destroyed or rendered financially valueless to excuse a party from performance.

 

Trump Tower Condo Buyer’s Bait-and-Switch Claim Defeated – Seventh Circuit

The Seventh Circuit recently affirmed the District Court’s trial verdict in favor of some Trump-controlled entities in a consumer fraud suit filed by a purchaser of some Trump Tower condominium units. 

In Goldberg v. 401 North Wabash Investor, LLC, 2014 WL 2579939 (7th Cir. 2014), an eighty-something real estate investor sued on a bait-and-switch theory after a condominium developer unilaterally removed certain hotel facilities from the project’s common elements before the closing. 

She sued for consumer fraud, breach of contract, violation of the Illinois Condominium Property Act and filed another count under Illinois securities law.  After a trial, a jury returned a verdict in the seller’s favor and in a later bench trial, the court found for the seller on the plaintiff’s breach of contract and Condominium Act claims.  The plaintiff appealed.

Held: Affirmed

Reasons:

The Seventh Circuit upheld the jury’s verdict for the seller on the plaintiff’s consumer fraud count.  The plaintiff’s case centered on the seller’s removal of certain hotel facilities from the common elements pursuant  to a “change clause” in the underlying sale documents.

The sale documents’ change clause gave the seller complete discretion to modify any condominium documents.

When the seller removed the hotel facilities (food and beverage operations, meeting rooms and certain health club use), the plaintiff sought return of the approx. $500K in earnest money she paid.  The seller said no and plaintiff sued.

Consumer Fraud: Bait-and-Switch

Plaintiff’s consumer fraud claim alleged classic bait-and-switch: where a seller promotes a specific product knowing that he won’t sell it.  Instead, the customer shows up, the seller tells him the product is sold out and the seller pulls a “switch” – he tries to get the unwitting consumer to pay a higher price for a different product.

The Court found that the jury could properly find there was no bait-and-switch.  The condominium sale documents clearly allowed the seller to make changes to the condo common elements at its sole discretion.

So, by the seller telegraphing to a buyer (like plaintiff) that it had an unqualified right to modify the common elements, there was no bait-and-switch.  The plaintiff, an experienced real estate investor, was essentially on notice that the seller could amend the declaration at any time.

Breach of Contract – Why No Jury?

On the plaintiff’s breach of contract count, the Seventh Circuit agreed with the District Court that plaintiff wasn’t entitled to a jury trial.  The Court looked beyond the cause of action’s title and instead viewed its substance.

Plaintiff’s contract claim really sought rescission – she wanted her half a million in earnest money back.  Since rescission is an equitable remedy, a jury trial isn’t allowed.  (*5).  The fact that the plaintiff sought monetary interest didn’t convert her claim from an equitable one to an action at law (for money damages).

Take-away: This case is post-worthy for both its current events and celebrity quotient.  Aside from that, the case serves as a good illustration of a time-honored consumer fraud theory (bait and switch) adapted to a modern-day complex real estate contractual setting.

Goldberg also provides a dramatic example of a court looking beyond a cause of action’s label (breach of contract) and discerning the substantive relief sought (rescission) by a party to determine whether a given claim is legal (and triable to a jury) or equitable (no jury trial) in nature.

LLC Member Not Liable For Fraud Carried Out On Behalf of LLC

The First District expansively construed Section 10-10 of the Illinois LLC statute (805 ILCS 180/10-10) to immunize LLC managers and members from personal liability for misdeeds carried out on the LLC’s behalf.

In Dass v. Yale, 2013 IL App (1st) 122520, the plaintiffs sued an LLC member (along with a general contractor and sales agent) for construction defects in their Chicago condominium.  They alleged the defendant LLC member made multiple misrepresentations in various written sales documents concerning the property’s roof and plumbing condition and past problems with leaking. 

After getting an uncollectable default judgment against the dissolved general contractor, the plaintiffs focused their case on the individual LLC member.  The Court granted the LLC member’s section 2-619 motion and the plaintiffs appealed.

Held: Affirmed.  Section 10-10 of the LLC Act provides that LLC members are not individually liable for actions taken on behalf of the LLC.

Rules/Reasoning:

Section 10-10 of the Illinois LLC Act plainly provides that liabilities of an LLC – arising in contract or tort – belong solely to the LLC and that LLC members or managers aren’t personally liable for LLC liabilities. 

Members of an LLC can only be personally responsible for LLC liabilities where (a) the LLC articles of organization explicitly provide for personal liability; and (b) the member(s) consents in writing to be personally bound by the articles’ section that imposes personal liability on the member(s). 

In addition, an LLC’s failure to follow corporate formalities in its business is not a basis for imposing personal liability on LLC members or managers. ¶37

Here, the plaintiffs’ fraud allegations against the defendant LLC member were premised on conduct he engaged in while carrying out his marketing efforts on behalf of the LLC.  The plaintiffs’ assertion that the defendant misrepresented the property’s condition and its construction materials alleged conduct occurring in the course of the LLC trying to sell the property.

 Since there was no evidence that the LLC’s organizing papers provided for personal liability or that the defendant consented in writing to liability, Section 10-10 of the LLC  Act clearly immunized the defendant from the plaintiffs’ fraud claims.  (¶¶38-39).

Two cases that figure prominently in the Dass analysis are Carrollo v. Irwin, 2011 IL App (1st) 102765 and Puleo v. Topel (368 Ill.App.3d 63) which, respectively, hold that LLC members aren’t individually liable for obligations occurring prior to LLC formation (Carrollo) or after LLC dissolution (Puleo).  

Dass, Carrollo and Puleo form a three-part case continuum on the issue of an LLC member’s liability for actions taken before, during and after an LLC’s formation and dissolution.  The synthesized holding of the three cases underscores that actions of LLC personnel will not give rise to personal liability; even for intentional torts (i.e., fraud). (¶¶ 39-44).  The LLC Act gives members of unformed LLCs more protection than officers of unformed corporations).

Take-away: A harsh result for plaintiffs trying to sue LLC members for acts taken under the auspices of the LLC.  Dass stands for clear proposition that until the legislature amends the LLC Act, LLC members and managers’ acts are protected – as long as they’re taken in connection with the carrying out the LLC’s business.

 Had the plaintiffs claimed that the LLC member committed fraud individually (and unrelated to his LLC duties), the result may have been different.