Discovery Rule Can’t Save Trustee’s Fraud Suit – No ‘Continuing’ Violation Where Insurance Rep Misstates Premium Amount – IL Court

Gensberg v. Guardian, 2017 IL App (1st) 153443-U, examines the discovery rule in the context of common law and consumer fraud as well as when the “continuing wrong” doctrine can extend a statute of limitations.

Plaintiffs bought life insurance from agent in 1991 based in part on the agent’s representation that premiums would “vanish” in 2003 (for a description of vanishing premiums scenario, see here).  When the premium bills didn’t stop in 2003, plaintiff complained and the agent informed it that premiums would cease in 2006.

Plaintiff complained again in 2006 when it continued receiving premium bills.  This time, the agent informed plaintiff the premium end date would be 2013. It was also in this 2006 conversation that the agent, for the first time, informed plaintiff that whether premiums would vanish is dependent on the policy dividend interest rate remaining constant.

When the premiums still hadn’t stopped by 2013, plaintiff had seen (or heard enough) and sued the next year.  In its common law and consumer fraud counts, plaintiff alleged it was defrauded by the insurance agent and lured into paying premiums for multiple years as a result of the agent’s misstatements.

The Court dismissed the plaintiffs’ suit on the grounds that plaintiff’s fraud claims were time barred under the five-year and three-year statutes of limitation for common law and statutory fraud.

Held: Dismissal Affirmed.

Rules/reasons:

The statute of limitations for common law fraud and consumer fraud is five years and three years, respectively. 735 ILCS 5/13-205, 805 ILCS 505/10a(e). Here, plaintiff sued in 2014.  So normally, its fraud claims had to have accrued in 2009 (common law fraud) and 2011 (consumer fraud) at the earliest for the claims to be timely.  But the plaintiff claimed it didn’t learn it was injured until 2013 under the discovery rule.

The discovery rule, which can forestall the start of the limitations period, posits that the statute doesn’t begin to run until a party knows or reasonably should know (1) of an injury and that (2) the injury was wrongfully caused. ‘Wrongfully caused’ under the discovery rule means there is enough facts for a reasonable person would be put on inquiry notice that he/she may have a cause of action. The party relying on the discovery rule to file suit after a statute of limitations runs has the burden of proving the date of discovery. (¶ 23)

The plaintiff alleged that it wasn’t until 2013 that it first learned that defendant misrepresented the vanishing date for the insurance premiums.
The Court rejected this argument based on the allegations of the plaintiff’s complaint. It held that the plaintiff knew or should have known it was injured no later than 2006 when the agent failed to adhere to his second promised deadline (the first was in 2003 – the original premium end date) for premiums to cease.

Plaintiff stated it complained to the insurance agent in 2003 and again in 2006 that it shouldn’t be continuing to get billed.  The court found that the agent’s failure to comply with multiple promised deadlines for premiums to stop should have put plaintiff on notice that he was injured in 2003 at the earliest and 2006 at the latest. Since plaintiff didn’t sue until 2014 – eight years later – both fraud claims were filed too late.

Grasping at a proverbial straw, the plaintiff argued its suit was saved by the “continuing violation” rule.  This rule can revive a time-barred claim where a tort involves repeated harmful behavior.  In such a case, the statute of limitations doesn’t run until (1) the date of the last injury or (2) when the harmful acts stop. But, where there is a single overt act which happens to spawn repetitive damages, the limitations period is measured from the date of the overt act. (¶ 26).

The court in this case found there was but a single harmful event – the agent’s failure to disclose, until 2006, that whether premiums would ultimately vanish was contingent on dividend interest rates remaining static. As a result, plaintiff knew or should have known it was harmed in 2006 and could not take advantage of the continuing violation rule to lengthen its time to sue.

Take-aways:

1/ Fraud claims are subject to a five-year (common law fraud) and three-year (consumer fraud) limitations period;

2/ The discovery rule can extend the time to sue but will not apply where a reasonable person is put on inquiry notice that he may have suffered an actionable wrong;

3/  “Continuing wrong” doctrine doesn’t govern where there is a single harmful event that has ongoing ramifications. The plaintiff’s time to sue will be measured from the date of the tortious occurrence and not from when damages happen to end.

As-Is Language In Sales Literature Defeats Fraud Claim Involving ’67 Corvette (Updated April 2017)

In late March 2017, a Federal court in Illinois granted summary judgment for a luxury car auctioneer in a disgruntled buyer’s lawsuit premised on a claimed fake Corvette.

The Corvette aficionado plaintiff in Pardo v. Mecum Auction, Inc., 2017 WL 1217198 alleged the auction company misrepresented that a cobbled-together 1964 Corvette was a new 1967 Corvette – the vehicle plaintiff thought he was buying.  Plaintiff’s suit sounded in common law fraud and breach of contract.  The Court previously dismissed the fraud suit and later granted summary judgment for the defendant on the plaintiff’s breach of contract claim.

The Court dismissed the fraud suit based on “non-reliance” and “as-is” language in the contract.  Since reliance is a required fraud element, the non-reliance clause preemptively gutted the plaintiff’s fraud count.

Denying the plaintiff’s motion to reconsider, the Court noted that an Illinois fraud claimant cannot allege he relied on a false statement when the same writing provides he’s buying something in as-is condition.  The non-reliance/as-is disclaimer also neutralizes a fraud claim based on oral statements and defeats breach of express and implied warranty claims aimed at misstatements concerning a product.

By attaching the contract which contained the non-reliance language, the plaintiff couldn’t prove his reliance as a matter of law.

The Court found for the defendant on plaintiff’s breach of contract claim.  The plaintiff’s operative Second Amended Complaint alleged the auction company breached a title processing section of the contract: that it failed to timely deliver title to the vehicle to the plaintiff.

The Court sided with the auction company based on basic contract interpretation rules.  All the contract required was that the defendant “process” the title within 14 business days of the sale.  It didn’t saddle the defendant with an obligation to deliver the title to a specific person.  Since the evidence in the record revealed that the defendant did process and transfer the title to a third party within the 14-day time frame, plaintiff could not prove that defendant breached the sales contract.

The plaintiff also couldn’t prove damages – another indispensable breach of contract element.  That is, even if the auction company failed to process the title, the plaintiff didn’t show that it suffered any damages.  The crux of the plaintiff’s lawsuit was that it was sold a car that differed from what was advertised.  Whether the defendant complied with the 14-day title processing requirement had nothing to do with plaintiff’s alleged damages.

Since the plaintiff could not offer evidence to support its breach and damages components of its breach of contract action, the Court granted summary judgment for the defendant.

Lastly, the Court rejected plaintiff’s rescission remedy argument – that the contract should be rescinded for defendant’s fraud and failure to perform.

The Court’s ruling that the defendant performed in accordance with the title processing language defeated plaintiff’s nonperformance argument.  In addition, the Court prior dismissal of the plaintiff’s fraud claim based on the contractual non-reliance language knocked out the rescission-based-on-fraud argument.

 

Afterwords:

Non-reliance or “as is” contract text will make it hard if not impossible to allege fraud in connection with the sale of personal property;

A breach of contract carries the burden of proof on both breach and damages elements.  The failure to prove either one is fatal to a breach of contract claim.

In hindsight, the plaintiff should have premised its breach of contract claim on the defendant’s failure to deliver a car different from what was promoted. This arguably would have given the plaintiff a “hook” to keep its breach of contract suit alive and survive summary judgment.

 

Business Lender States Fraud Claim Versus Corporation But Not Civil Conspiracy One in Loan Default Case – IL 1st Dist.

When a corporate defendant and its key officers allegedly made a slew of verbal and written misstatements concerning the corporation’s financial health to encourage a business loan, the plaintiff lender filed fraud and civil conspiracy claims against various defendants.  Ickert v. Cougar Package Designers, Inc., 2017 IL App (1st) 151975-U examines the level of specificity required of fraud and conspiracy plaintiffs under Illinois pleading rules.

The plaintiff alleged that corporate officers falsely inflated both the company’s current assets and others in the pipeline to induce plaintiff’s $200,000 loan to the company.  When the company failed to repay the loan, the plaintiff brought fraud and conspiracy claims – the latter based on the theory that the corporate agents conspired to lie about the company’s financial status to entice plaintiff’s loan.

The trial court granted the defendants’ motion to dismiss the fraud and conspiracy claims and the plaintiff appealed.

Partially reversing the trial court, the First District first focused on the pleading elements of common law fraud and the Illinois Code provision (735 ILCS 5/2-606) that requires operative papers to be attached to pleadings that are based on those papers.

Code Section 2-606 states that if a claim or defense is based on a written instrument, a copy of the writing must be attached to the pleading as an exhibit.  However, not every relevant document that a party seeks to introduce as an exhibit at trial must be attached to a pleading.

Here, while part of plaintiff’s fraud claim was predicated on a faulty written financial disclosure document, much of the claim centered on the defendants’ verbal misrepresentations.  As a consequence, the Court found that the plaintiff wasn’t required to attach the written financial disclosure to its complaint.

Sustaining the plaintiff’s fraud count against the corporate officer defendants (and reversing the trial court), the Court noted recited Illinois’ familiar fraud pleading elements: (1) a false statement of material fact, (2) knowledge or belief that the statement was false, (3) an intention to induce the plaintiff to act, (4) reasonable reliance on the truth of the challenged statement, and (5) damage to the plaintiff resulting from the reliance.

While silence normally won’t equal fraud, when silence is accompanied by deceptive conduct or suppression of a material fact, this is active concealment and the party concealing given facts is then under a duty to speak.

Fraud requires acute pleading specificity: the plaintiff must allege the who, what, where, and when of the misrepresentation.  Since the plaintiff pled the specific dates and content of various false statements, the plaintiff sufficiently alleged fraud against the corporate officers.

(¶¶ 22-26)

A valid civil conspiracy claim requires the plaintiff to allege (1) an agreement by two or more persons or entities to accomplish by concerted action either an unlawful purpose or a lawful purpose by unlawful means; (2) a tortious act committed in furtherance of that agreement; and (3) an injury caused by the defendant.  The agreement is the central conspiracy element.  The plaintiff must show more than a defendant had “mere knowledge” of fraudulent or illegal actions.  Without a specific agreement to take illegal actions, the conspiracy claim falls.

In the corporate context, a civil conspiracy claim cannot exist between a corporation’s own officers or employees.  This is because corporations can only act through their agents and any acts taken by a corporate employee is imputed to the corporation.

So, for example, if employees 1 and 2 agree to defraud plaintiff, there is no conspiracy since the employees are acting on behalf of the corporation – they are not “two or more persons.”  Since this case’s plaintiff pled the two conspiracy defendants were officers of the same corporate defendant, the trial court properly dismissed the conspiracy count. (¶¶ 29-30)

The appeals court also affirmed the trial court’s denial of the plaintiff’s motion to amend his complaint against the corporate defendant.  While the right to amend pleadings is liberally granted by Illinois courts, the right is not absolute.

In deciding whether to allow a plaintiff to amend pleadings, a court considers (1) whether the amendment would cure a defect in the pleadings, (2) whether the other party would be prejudiced or surprised by the proposed amendment, (3) whether the proposed amendment is timely, and (4) whether there were previous opportunities to amend.

Here, since the plaintiff failed multiple opportunities to make his fraud and conspiracy claims stick, the First District held that the trial court properly denied the plaintiff’s fourth attempt to amend his complaint.

Afterwords:

This case provides a useful summary of fraud’s heightened pleading elements under Illinois law.  It also solidifies the proposition that a defendant can’t conspire with itself: a there can be no corporation-corporate officer conspiracy.  They are viewed as one and the same in the context of a civil conspiracy claim.

The case’s procedural lesson is that while parties normally are given wide latitude to amend their pleadings, a motion to amend will be denied where a litigant has had and failed multiple chances to state a viable claim.