Three-Year Limitations Period Governs Bank Customer’s Suit for Misapplied Deposits – IL First Dist.

Now we can add PSI Resources, LLC v. MB Financial Bank (2016 IL App (1st) 152204) to the case canon of decisions that harmonize conflicting statutes of limitations and show how hard it is for a corporate account holder to successfully sue its bank.

The plaintiff, an assignee of three related companies**, sued the companies’ bank for misapplying nearly $400K in client payments over a several-year period.  The bank moved to dismiss, arguing that plaintiff’s suit was time-barred by the three-year limitations period that governs actions based on negotiable instruments.***  The court dismissed the complaint and the plaintiff appealed.

Held: Affirmed

Reasons:

The key question was whether the Uniform Commercial Code’s three-year limitations period for negotiable instrument claims or the general ten-year period for breach of written contract actions applied to the plaintiff’s negligence suit against the bank.  The issue was outcome-determinative since the plaintiff didn’t file suit until more than three years passed from the most recent misapplied check.

Illinois applies a ten-year limitations period for actions based on breach of written contract.  735 ILCS 5/13-206.  By contrast, an action based on a negotiable instrument is subject to the shorter three-year period.  810 ILCS 5/4-111.

If the subject of a lawsuit is a negotiable instrument, the UCC’s three-year time period applies since UCC Article 4 actions based on conversion and Article 3 suits for improper payment both involve negotiable instruments.  810 ILCS 5/3-118(g)(conversion); 810 ILCS 5/4-111 (improper payment).

Rejecting plaintiff’s argument that this was a garden-variety breach of contract action to which the ten-year period attached, the court held that since plaintiff’s claims were essentially based on banking transactions, the three-year limitations period for negotiable instruments governed. (¶¶ 36-38)

Where two statutes of limitations arguably apply to the same cause of action, the statute that more specifically relates to the claim applies over the more general statute.  While the ten-year statute for breach of written contracts is a general, “catch-all” limitations period, section 4-111’s three-year rule more specifically relates to a bank’s duties and obligations to its customers.

And since the three-year rule was more specific as it pertained to the plaintiff’s improper deposit and payment claims, the shorter limitations period controlled and plaintiff’s suit was untimely.

The court also sided with the bank on policy grounds.  It stressed that the UCC aims to foster fluidity and efficiency in commercial transactions.  If the ten-year period applied to every breach of contract action against a bank (as plaintiff argued), the UCC’s goal of promoting commercial finality and certainty would be frustrated and possibly bog down financial deals.

The other plaintiff’s argument rejected by the court was that the discovery rule saved the plaintiff’s lawsuit.  The discovery rule protects plaintiffs who don’t know they are injured.  It suspends (tolls) the limitations period until a plaintiff knows or should know he’s been hurt.  The discovery rule standard is not subjective certainty (“I now realize I have been harmed,” e.g.).  Instead, the rule is triggered where “the injured person becomes possessed of sufficient information concerning his injury and its cause to put a reasonable person on inquiry to determine whether actionable conduct is involved.” (¶ 47)

Here, the evidence was clear that plaintiff’s assigning companies received deposit statements on a monthly basis for a several-year period.  And the monthly statements contained enough information to put the companies on notice that the bank may have misapplied deposits.  According to the court, these red flags should have motivated the plaintiff to dig deeper into the statements’ discrepancies.

Take-aways:

This case suggests that an abbreviated three-year limitations period applies to claims based on banking transactions; even if a written contract – like an account agreement – is the foundation for a plaintiff’s action against a bank.  A plaintiff with a possible breach of contract suit against his bank should take great care to sue within the three-year period when negotiable instruments are involved.

Another case lesson is that the discovery rule has limits.  If facts exist to put a reasonable person on notice that he may have suffered financial harm, he will be held to a shortened limitations period; regardless of whether he has actual knowledge of harm.

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**  The court took judicial notice of the Illinois Secretary of State’s corporate registration database which established that the three assigned companies shared the same registered agent and business address.

*** 810 ILCS 5/3-104 (“negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.)

 

Landlord Subject to Potential Bailment and Intentional Infliction Claims for Leaving Tenant’s Property On Sidewalk – IL ND

The Internet is awash in state-by-state summaries of what a landlord can and can’t do with property left behind by a residential tenant. The various abandoned property rules range from making the landlord do nothing, to requiring it to hold the tenant’s property for a fixed number of days, to sending formal notice to the tenant before disposing of the property. For a good summary of various state’s abandoned property laws, see here.  Chicago’s (where I practice) Residential Landlord Tenant Ordinance (RLTO), widely viewed as pro-tenant in every way, requires a landlord to store the property for seven days before disposing of it. See RLTO 5-12-130(f)

Zissu v. IH2 Property Illinois, LP, 2016 WL 212937, examines what causes of action apply where a landlord puts an evicted tenant’s property on a city street and the property is destroyed or stolen as a result.

The plaintiffs, who were evicted in an earlier state court forcible detainer action, sued their ex-landlord in Federal court (the landlord was a Delaware business entity) alleging negligence, conversion, bailment, and intentional infliction of emotional distress after the former landlord placed the plaintiff’s home furnishings, jewelry and personal documents on the sidewalk and the plaintiff’s property was stolen or damaged.

Granting in part and denying in part the landlord’s motion to dismiss, the court examined the pleading elements of the bailment, trespass to chattels and intentional infliction of emotional distress torts.

The court upheld the plaintiff’s bailment count. A bailment occurs where one party delivers goods or personal property to another who has agreed to accept the property and deal with it in a particular way.

To recover under a bailment theory, a plaintiff must allege: (1) an express or implied agreement to create a bailment, (2) delivery of the property to the bailee by the bailor, (3) the bailee’s acceptance of the property, and (4) the bailee’s failure to return the property or delivery of the property to the bailor in a damaged condition.

An implied, or “constructive,” bailment occurs where a defendant voluntarily receives a plaintiff’s property for some purpose other than that of obtaining ownership of the property. The implied bailment can be found with reference to the surrounding circumstances including (i) the benefits received by the parties, (ii) the parties’ intentions, (iii) the kind of property involved, and (iv) the opportunities for each party to exert control over the property.

The court held that the complaint’s allegations that the defendant actively took possession of the plaintiff’s property and removed it from the leased premises was sufficient to state a bailment claim under Federal notice pleading standards.

The court also sustained the plaintiff’s conversion and trespass to chattels claim. The crux of both of these claims is that a defendant either seized control of a plaintiff’s property (conversion) or interfered with a plaintiff’s property (trespass to chattels). A colorable conversion claim contains the added requirement that a plaintiff make a demand for possession – unless the defendant has already disposed of a plaintiff’s property; in which case a demand would be futile.

The court here found that the plaintiffs’ allegations that their former landlord dispossessed plaintiffs of their property stated a trespass to chattels and conversion claim for purposes of a motion to dismiss. The court also agreed with the plaintiff that a formal demand for the property would have been pointless since the defendant had already placed the plaintiffs’ property on the street and sidewalk next to the plaintiffs’ home.

Lastly, the court denied the defendant’s attempt to dismiss the plaintiff’s intentional infliction claim. An intentional infliction of emotional distress plaintiff must plead (1) extreme and outrageous conduct, (2) a defendant’s intent to inflict severe emotional distress on a plaintiff, and (3) the defendant’s conduct did in fact cause the plaintiff emotional distress.

Here, the court found that the plaintiffs’ claims that the defendant put expensive jewelry, medication and sensitive financial documents on the street in view of the whole neighborhood sufficiently stated an intentional infliction claim.

Afterwords:

This case presents an interesting illustration of some lesser-used and venerable torts (bailment, trespass to chattels) adapted to a modern-day fact pattern.

The continued vitality of the bailment and trespass to chattel theories shows that personal property rights still enjoy a privileged status in this society.

The case also serves as a reminder for landlords to check applicable abandoned property laws before disposing of a decamped tenant’s belongings.  As this case amply shows, a landlord who removes tenant property without notice to the tenant, does so at its peril and opens itself up to a future damages action.

 

 

 

Voluntary Payment of Wages Sinks Transit Agency’s Conversion Counterclaim Against Ex-Employees – IL ND

In Laba v. CTA, 2016 WL 147656 (N.D.Ill. 2016), the Court considers the contours of the conversion tort in a dispute involving former Chicago Transit Authority (CTA) employees who lied about their hours worked.

The CTA claimed the employees converted or “stole” paycheck monies by falsifying employee time records in order to get paid by the agency.

The Court dismissed the CTA’s conversion claim based on the involuntary payment doctrine.  Conversion applies where a plaintiff shows (1) a defendant exercised unauthorized control over the plaintiff’s personal property; (2) plaintiff’s right to immediate possession of the property; and (3) a demand for possession of the property.  

A colorable conversion claim must involve specifically identifiable property.  Money can be the subject of  a conversion claim but it must be a specific source of funds.  A general obligation (“John owes me money and so he basically stole from me,” e.g.) isn’t enough for actionable conversion.

A well-established conversion defense is the voluntary payment rule.  This rule posits that where one party voluntarily transfers property to another, even if the transfer is mistaken, there is no conversion.  In such a case, there is a debtor-creditor relationship: the debtor would be the person to whom the funds were paid and the creditor the paying party. 

Here, since the CTA voluntarily paid money to the employees, in the form of regular paychecks, those monies could not be subject to a later conversion suit.  The CTA did not pay the ex-workers under duress.  The fact that the workers may not have earned their pay doesn’t change the analysis.  At most, according to the court, the time sheet embellishments created a “general debt arising from fraudulent conduct.”  The CTA has a remedy to recoup the funds; it’s just not one for conversion. 

Afterwords:

This case presents a creative use of the conversion tort in an unorthodox fact setting.  The case lesson is clear: where an employer pays an employee of the employer’s own volition, the payment will be considered “voluntary” even where it turns out the employee didn’t deserve the payment (i.e. by not working).  In such a case, the employer’s appropriate remedy is one for breach of contract or unjust enrichment.  A civil conversion claim will not apply to voluntarily employer-employee payments.