General Contractor Insolvency, Not Owner Recourse, is Key Implied Warranty of Habitability Test – IL First Dist.

In Sienna Court Condominium Association v. Champion Aluminum Corporation, 2017 IL App (1st) 143364, the First District addressed two important issues of common law and statutory corporate law.  It first considered when a property owner could sue the subcontractor of a defunct general contractor where there was no contractual relationship between the owner and subcontractor and then examined when a defunct limited liability company (LLC) could file a lawsuit in the LLC’s name.

The plaintiff condo association sued the developer, general contractor (“GC”) and subcontractors for various building defects.  The subcontractors moved to dismiss the association’s claims on the ground that they couldn’t be liable for breaching the implied warranty of habitability if the plaintiff has possible recourse from the defunct GC’s insurer.

The trial court denied the subcontractors’ motion and they appealed.

Affirming denial of the subcontractors’ motions, the First District considered whether a homeowner’s implied warranty claim could proceed against the subcontractors of an insolvent GC where (1) the plaintiff had a potential source of recovery from the GC’s insurer or (2) the plaintiff had already recovered monies from a warranty fund specifically earmarked for warranty claims.

The court answered “yes” (plaintiff’s suit can go forward against the subs) on both counts. It held that when deciding whether a plaintiff can sue a subcontractor for breach of implied warranty of habitability, the focus is whether or not the GC is insolvent; not whether plaintiff can possibly recover (or even has recovered) from an alternate source (like a dissolved GC’s insurer).

For precedential support, the Court looked to 1324 W. Pratt Condominium Ass’n v. Platt Construction Group,   2013 IL App (1st) 130744 where the First District allowed a property buyer’s warranty claims versus a subcontractor where the general contractor was in good corporate standing and had some assets.  The court held that an innocent purchaser can sue a sub where the builder-seller is insolvent.

In the implied warranty of habitability context, insolvency means a party’s liabilities exceed its assets and the party has stopped paying debts in the ordinary course of its business. (¶¶ 89-90).  And under Pratt’s “emphatic language,” the relevant inquiry is GC’s insolvency, not plaintiff’s “recourse”.¶ 94

Sienna Court noted that assessing the viability of an owner’s implied warranty claim against a subcontractor under the “recourse” standard is difficult since there are conceivably numerous factual settings and arguments that could suggest plaintiff has “recourse.”  The court found the insolvency test more workable and more easily applied then the amorphous recourse standard. (¶ 96).

Next, the Court considered the chronological outer limit for a dissolved LLC to file a civil lawsuit.  The GC dissolved in 2010 and filed counterclaims in 2014.  The trial court ruled that the 2014 counterclaims were too late and time-barred them.

The appeals court affirmed.  It noted that Section 35-1 of the Illinois LLC Act (805 ILCS 180/1-1 et seq.) provides that an LLC which “is dissolved, and, unless continued pursuant to subsection (b) of Section 35-3, its business must be wound up,” upon the occurrence of certain events, including “Administrative dissolution under Section 35-25.” 805 ILCS 180/35-1

While Illinois’ Business Corporation Act of 1993 specifies that a dissolved corporation may pursue civil remedies only up to five years after the date of dissolution (805 ILCS 5/12.80 (West 2014)), the LLC Act is silent on when a dissolved LLC’s right to sue expires.  Section 35-4(c) only says “a person winding up a limited liability company’s business may preserve the company’s business or property as a going concern for a reasonable time”

The Court opted for a cramped reading of Section 35-4’s reasonable time language.  In viewing the LLC Act holistically, the Court found that the legislature contemplated LLC’s having a finite period of time to wind up its affairs including bringing any lawsuits.  Based on its restrictive interpretation of Section 35-4, the Court held the almost four-year gap between the GC’s dissolution (2010) and counterclaim filing (2014) did not constitute a reasonable time.

Afterwords:

Sienna Court emphasizes that a general contractor’s insolvency – not potential recourse – is the dominant inquiry in considering a property owner’s implied warranty of habitability claim against a subcontractor where the general contractor is out of business and there is no privity of contract between the owner and subcontractor.

The case also gives some definition to Section 35-4 of the LLC Act’s “reasonable time” standard for a dissolved LLC to sue on pre-dissolution claims.  In this case, the Court found that waiting four years after dissolution to file counterclaims was too long.

 

 

Snow Plower’s Quantum Meruit Claim Fails; Dissent Takes Rule 23 Publishing Standards to Task – IL 1st Dist.

In Snow & Ice, Inc. v. MPR Management, 2017 IL App (1st) 151706-U, a snow removal company brought breach of contract and quantum meruit claims against a property manager and several property owners for unpaid services.

The majority affirmed dismissal of the plaintiff’s claims and in dissent, Judge Hyman gives a scathing critique of Rule 23, which provides standards for publishing (or not) opinions, including the rule’s penchant for quiet minority voices on an appeals court.

Plaintiff sued to recover about $90K for snow removal services it supplied to nine separate properties managed by the property manager defendant.  After nonsuiting the management company, the plaintiff proceeded against the property owners on breach of contract and quantum meruit claims.

The trial court granted the nine property owners’ motion to dismiss on the basis there was no privity of contract between plaintiff and the owners.  The court dismissed the quantum meruit suit because an express contract between the plaintiff and property manager governed the parties’ relationship and a quantum meruit claim can’t co-exist with a breach of express contract action.

Affirming the Section 2-615 dismissal of the breach of contract claims, the appeals court rejected the plaintiff’s claim that the management company contracted with plaintiff on behalf of the property owner defendants.  In Illinois, agency is a question of fact, but the plaintiff still must plead facts which, if proved, could establish an agency relationship.

A conclusory allegation of a principal-agent relationship between property manager and owners is not sufficient to survive a motion to dismiss.  Since the plaintiff only alleged the bare conclusion that the property owners were responsible for the management company’s contract, the First District affirmed dismissal of plaintiff’s breach of contract claims.

The Court also affirmed the dismissal of the plaintiff’s quantum meruit claims against the owners.  A quantum meruit plaintiff must plead (1) that it performed a service to defendant’s benefit, (2) it did not perform the service gratuitously, (3) defendant accepted the service, and (4) no contract existed to prescribe payment for the service.  Quantum meruit is based on an implied promise by a recipient of services or goods to pay for something of value which it received.  (¶¶ 17-18).

Since the properties involved in the lawsuit were commercial (meaning, either vacant or leased), the Court refused to infer that the owners wanted the property plowed.  It noted that if the property was vacant, plaintiff would have to plead facts to show that the owner wanted plaintiff to clear snow from his/her property.  If leased, the plaintiff needed facts tending to show that the owner/lessor (as opposed to the tenant) implicitly agreed to pay for the plaintiff’s plowing services.  As plaintiff’s complaint was bereft of facts sufficient to establish the owners knew of and impliedly agreed to pay plaintiff for its services, the quantum meruit claim failed.

If leased, the plaintiff needed facts tending to show that the owner/lessor (as opposed to the tenant) implicitly agreed to pay for the plaintiff’s plowing services.  As plaintiff’s complaint was bereft of facts sufficient to establish the owners knew of and impliedly agreed to pay plaintiff for its services, the quantum meruit claim failed.

In dissent, Judge Hyman agreed that the plaintiff’s breach of contract claim was properly dismissed but found that the plaintiff did plead enough facts to sustain a quantum meruit claim.  Hyman’s dissent’s true value, though, lies in its in-depth criticism of Illinois Supreme Court Rule 23’s publication guidelines.

Rule 23 provides for an opinion’s publication only where a majority of the panel deems a decision one that “establishes a new rule of law or modifies, explains, or criticizes an existing rule of law” or “resolves, creates, or avoids an apparent conflict of authority within the Appellate Court.” Sup. Ct. R. 23(a).

Hyman’s thesis is that these standards are too arbitrary and the Rule should be changed so that just one justice, instead of a majority of the panel, is all that’s needed to have a decision published.  Hyman then espouses the benefits of dissents and special concurrences; they perform the valuable functions of clarifying, questioning and developing the law.

In its current configuration, Rule 23 arbitrarily allows a majority of judges to squelch lone dissenters and effectively silence criticism.  Judge Hyman advocates for Illinois to follow multiple other courts’ lead and adopt a “one justice” rule (a single judge’s request warrants publication).  By implementing the one justice rule, minority voices on an appeals panel won’t so easily be squelched and will foster legal discourse and allow the competing views to “hone legal theory,

By implementing the one justice rule, minority voices on an appeals panel won’t so easily be squelched and will foster legal discourse and allow the competing views to “hone legal theory, concept and rule.”

 

 

Evidence Rules Interplay – Authenticating Facebook Posts and YouTube Videos

Evidence Rules 901, 803 and 902 respectively govern authentication generally, the foundation rules for business records, and “self-authenticating” documents at trial.

The Fourth Circuit recently examined the interplay between these rules in the context of a Federal conspiracy trial.  In  United States v. Hassan, 742 F.3d 104 (4th Cir. Feb. 4, 2014), the Fourth Circuit affirmed a jury’s conviction of two defendants based in part on inflammatory, jihad-inspired Facebook posts and YouTube training videos attributed to them.

The Court first held that the threshold showing for authenticity under Rule 901 is low.  All that’s required is the offering party must make a prima facie showing that the evidence is what the party claims it is.  FRE 901(a).  In the context of business records, Rule 902(11) self-authenticates these records where they satisfy the strictures of Rule 803(6) based on a custodian’s certification.  Rule 803(6), in turn, requires the offering party to establish that (a) the records were made at or near the time (of the recorded activity) by – or from information transmitted by  – someone with knowledge, (b) that the records were “kept in the course of a regularly conducted activity or business”; and (c) that making the records was a regular practice of the business. FRE 803(6)(a)-(c).

Applying these rules, the Court held that certifications from Google’s and Facebook’s records custodians established the foundation for the Facebook “wall” posts and YouTube terror training videos.  In addition, the Court found that the prosecution sufficiently connected the two conspiracy defendants to the Facebook posts and YouTube videos by tracing them to internet protocol addresses that linked both defendants to the particular Facebook and YouTube accounts that generated the posts.

Notes: For a more detailed discussion of Hassan as well as an excellent resource on social media evidence developments, see the Federal Evidence Review (http://federalevidence.com/blog/2014/february/authenticating-facebook-and-google-records)