Tag: discovery rule

‘Inquiry Notice’ Element of Discovery Rule Dooms Plaintiff’s Fraud in Inducement Claim – IL First Dist.

The First District recently discussed the reach of the discovery rule in the course of dismissing a plaintiff’s fraud claims on statute of limitations grounds.

The plaintiff in Cox v. Jed Capital, LLC, 2016 IL App (1st) 153397-U, brought a slew of business tort claims when he claimed his former employer understated its value in an earlier buy-out of the plaintiff’s LLC interest.

Plaintiff’s 2007 lawsuit settled a year later and was the culmination of settlement discussions in which the defendants (the former employer’s owner and manager) produced conflicting financial statements.  The plaintiff went forward with the settlement anyway and released the defendants for a $15,000 payment.

In 2014, after reading a Wall Street Journal article that featured his former firm, plaintiff learned the company was possibly worth much more than was previously disclosed to him.  Plaintiff sued in 2015 for fraud in the inducement, breach of fiduciary duty and breach of contract.

The trial court dismissed the claims on the basis they were time-barred by the five-year limitations period and the plaintiff appealed.  He argued that the discovery rule tolled the limitations period and saved his claims since he didn’t learn the full extent of his injuries until he read the 2014 article.

Result: Dismissal of plaintiff’s claims affirmed.

Q: Why?

A: A fraud claim is subject to Illinois’ five-year statute of limitations codified at Section 13-205 of the Code of Civil Procedure.  Since the underlying financial documents were provided to the plaintiff in 2008 and plaintiff sued seven years later in 2015.  As a result, plaintiff’s claim was time-barred unless the discovery rule applies.

In Illinois, the discovery rule stops the limitations period from running until the injured party knows or reasonably should know he has been injured and that his injury was wrongfully caused.

A plaintiff who learns he has suffered from a wrongfully caused injury has a duty to investigate further concerning any cause of action he may have.  The limitations period starts running once a plaintiff is put on “inquiry notice” of his claim.  Inquiry notice means a party knows or reasonably should know both that (a) an injury has occurred and (b) it (the injury) was wrongfully caused.  (¶ 34)

Fraud in the inducement occurs where a defendant makes a false statement, with knowledge of or belief in its falsity, with the intent to induce the plaintiff to act or refrain from acting on the falsity of the statement, plaintiff reasonably relied on the false statement and plaintiff suffered damages from that reliance.

Plaintiff alleged the defendants furnished flawed financial statements to induce plaintiff’s consent to settle an earlier lawsuit for a fraction of what he would have demanded had he known his ex-employer’s true value.  The Court held that since the plaintiff received the conflicting financial reports from defendants in 2008 and waited seven years to sue, his fraud in the inducement claim was untimely and properly dismissed.

Afterwords:

This case paints a vivid portrait of the unforgiving nature of statutes of limitation.  A plaintiff has the burden of establishing that the discovery rule preserves otherwise stale claims.  If a plaintiff is put on inquiry notice that it may have been harmed (or lied to as the plaintiff said here), it has a duty to investigate and file suit as quickly as possible.  Otherwise, a plaintiff risks having the court reject its claims as too late.

Lawyer’s Breach of Fiduciary Duty and Constructive Trust Claim Against Ex Law Partner Barred By 5-Year Statute of Limitations

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Jimmy Connors is one of my all-time favorite tennis players and professional athletes.  Not just because he was such a fiery competitor who seemed to literally spill his blood and guts every time he took the court.  But because of his racket.

In an era dominated by space-age racket technologies like Kevlar, ceramics and various graphite-fiberglass amalgams, Connors stuck with his trusty Wilson T2000 – a primitive piece of steel with a wrap-around string aesthetic and microscopic sweet spot.  

There was just something about seeing the consummate throwback Connors, and his anachronistic Tool of his Trade,  continually vanquish a parade of younger adversaries with their ultra-modern tennis accoutrements that resonated with the purist in me.

That’s why Brennan v Constance, 2014 IL App (5th) 110555-U (2014), a lawsuit involving two former law partners fighting over legal fees owed by the tennis legend, naturally piqued my interest.

Facts:

The plaintiff and defendant was ere law partners in a three-person firm (the Firm).  Connors was a long-time Firm client.  

When the Firm disbanded, a major sticking point was fees owed the Firm by Connors for previous services.  Defendant believed the fees were his (since Connors was originally his client) while the other Firm members viewed the Connors fees owed to the Firm.

After more than a decade of litigation, Connors paid nearly $11 million to the Firm.  Defendant received nearly $7 million, while a former Firm partner got about $4M.

Plaintiff sued to impose a constructive trust over a portion of the $7 million in fees recovered by defendant because plaintiff believed defendant misled him concerning the amounts owed from the tennis great.

After a three-week bench trial, the Court entered judgment in plaintiff’s favor and imposed a constructive trust on the fees and awarded plaintiff more than $1.64 million – an amount equal to 25% of the Connors fees paid to defendanT.

Held: trial court reversed.  Plaintiff’s suit is time-barred.

Rules/Reasoning:

Plaintiff’s suit was barred by the five-year statute of limitations governing breach of fiduciary duty claims. 

Code Section 13-205’s five-year limitations period governs constructive trust and fiduciary duty claims.  ¶ 60, 735 ILCS 5/13-205.  A statute of limitations starts running when the cause of action accrues (when facts exist which authorize bringing the action).  

The “discovery rule” tolls (stops) the running of a limitations period until an injured plaintiff knows or should know he has been injured. 

Fraudulent concealment of a claim also tolls the limitations period.  ¶ 61.  In “passive” concealment cases, the plaintiff must show that defendant concealed a material fact that he was under a duty to disclose.  ¶ 63.   However, a plaintiff who knows he has been injured has a duty to investigate further and the limitations period will run when the plaintiff is put on “inquiry notice.”  A plaintiff doesn’t have to know the full extent of his injuries before the statutory clocks start ticking.

In reversing the plaintiff’s judgment, the 5th District found the plaintiff was on inquiry notice as early as 2004 (when he admittedly first learned of an aborted stock transfer that would have netted the Firm millions) but didn’t sue until 2010.  Since plaintiff missed the five-year limitations period, his suit was too late.

The Court also rejected plaintiff’s fiduciary duty argument: that since defendant owed plaintiff a fiduciary duty as a former law partner, it relaxed the limitations period.  The Court disagreed.  It held that while a fiduciary relationship may excuse an initial failure to investigate, it won’t lengthen the time to sue where a plaintiff knows of possible wrongdoing and fails to act on it.  ¶¶ 70-71.

Afterwords: This case illustrates the harsh results for  litigants who sits on their rights.  While a fiduciary relationship can bolster a fraudulent concealment argument and toll a limitations period, if facts exist that should put a reasonable person on inquiry notice of a wrongful act, the limitations period will run from the date of that notice.

 

BMW Dealership Defeats Fraud Suit On Statute of Limitations Grounds (ND IL)

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Occasionally, I’ll have a case that appears to be governed by two or more conflicting statutes of limitations.  For example, one statute will give a plaintiff four years to file suit while an apparently equally applicable one compresses the time to sue to two years.  As plaintiff, I usually (not always) argue for the longer limitations period to apply, while as defendant, I want the shortened time span (so I can move to dismiss the too-late complaint).  

In Belsky v. Fields Imports, Inc., 2013 WL 5819232 (N.D.Ill. 2013), the Northern District methodically analyzes which of two seemingly applicable (and conflicting) limitations periods (is it 10 years or 4 years?) applies to a breach of contract suit involving a defective motor vehicle.

Facts:

Plaintiff sued a car dealership and warranty service administrator for breach of various written agreements generated in connection with plaintiff’s purchase of a BMW.  Plaintiff bought the  car in 2005 and bought the service contract – which provided for repair and replacement of specified car parts – in 2009.  Plaintiff alleged that in 2012 she noticed that the car had a defective engine bolt.  When the defendants failed to provide warranty coverage for the bolt problem, plaintiff sued under state law breach of contract theories.  Defendants’ filed separate Rule 12(b)(6) motions to dismiss plaintiff’s complaint.  The court granted the motion and dismissed all counts of plaintiff’s complaint with prejudice.

Q: Why?

A: Plaintiff’s breach of contract claims against the dealership failed for two reasons: (1) the claims were time-barred; and (2) plaintiff failed to allege which part of the sales contract the dealer breached.  The court held that the four-year limitations period set forth in Uniform Commercial Code (“UCC”) Section 2-725 (810 ILCS 5/2-725) governed the plaintiff’s sales contract count. 

The UCC applies to “sales” transactions involving “goods” and Section 2-725 simply provides that “an action for breach of any contract for sale must be commenced within 4 years after the cause of action accrued“.  Belsky, *3, 810 ILCS 5/2-725(1).   There is also no “discovery rule”: the four year time limit applies regardless of whether the plaintiff lacked knowledge of the breach.  810 ILCS 5/2-725(2). 

Plaintiff argued that Illinois’ ten-year limitation period for written contract applied.  See 735 ILCS 5/13-206.  But the Court sided with defendants and applied the shorter four-year limitations period.  It held that the BMW, a car, clearly met the UCC’s definition of “goods” (a “thing” that was “moveable” at contract inception) and involved a “sale” (passing of title from seller to buyer for a price).  *3 (UCC Section 2-105(1)(goods definition); UCC Section 2-106(1)(sale def.). 

In addition, Code Section 13-206 (the ten-year statute for written contracts) expressly exempts claims under UCC Section 2-725 (the four-year rule) from its scope.  Section 13-206’s lead-in provides “except as provided in Section 2-725 of the Uniform Commercial Code…”.   Applying the four-year limitation, the Court held that the plaintiff’s breach of contract claims were three years too late and dismissed the case.  *3.

In dismissing the plaintiff’s service contract claims, the Court relied on agency law.  It held that the dealer entered into the contract on behalf of a disclosed principal (the warranty administrator).  Black letter agency rules dictate that an agent (here, the dealer) of a disclosed principal (the administrator) isn’t liable on contracts entered into for its principal.  *7.   The Court also dismissed the plaintiff’s service contract claim against the administrator because like the sales contract, the service contract also specifically excluded engine bolt defects from its coverage.  *9-10.

Take-aways: Where two conflicting limitations periods potentially control, the one that more specifically matches the facts will govern.  A contract for the sale of a “good” (like a car) will trigger the UCC’s four-year time span rather than the ten-year rule for written contracts. 

Also, a contractual disclaimer, if easy to read and find, will be upheld.