Subcontractor’s Failure to Get Certified Mail ‘Green Cards’ into Evidence = Draconian Trial Loss in Lien Spat

The Second District appeals court recently affirmed a harsh result against a subcontractor who failed to properly serve a Section 24 notice in accordance with the strictures of the Illinois Mechanics Lien Act.

The earth-moving subcontractor recorded a lien against a nascent Starbucks in Chicago’s western suburbs seeking payment for various change orders. It sent its lien notice to the property’s lender by certified mail but not to the property owner.

After a bench trial, the trial judge reluctantly found for the property owner defendants and held that the subcontractor’s lien notice failed to follow the Act.  The subcontractor appealed.

Affirming judgment for the property owner, the Court first emphasized the oft-cited rule that since rights created by the Act are statutory, the statutory technical and procedural requirements are strictly construed. The burden of proving that each requirement of the Act has been satisfied is on the party seeking to enforce its lien – here, the subcontractor.  But where there is no dispute that an owner actually received notice, courts will overlook technical defects.

Section 24 of the Act requires a subcontractor to serve notice of its intent to lien by certified mail or personal delivery to the record owner and lender (if known)within 90 days after completing the work on the property. 770 ILCS 60/24(a).

An exception to this notice requirement is where a general contractor’s sworn statement provides the owner notice of the subcontractor’s work and unpaid amount.

While courts will uphold a lien notice sent only to an owner (and not to the lender) since there is no concern of the owner being prejudiced or having to pay twice, the reverse isn’t true. Citing to half-century-old case law, the Court held that since notice to an owner is the ‘very substance of the basis on which a mechanic’s lien may be predicated,’, the Court refused to excuse the subcontractor’s failure to serve the owner with its lien notice even though the lender was given proper statutory notice.

And while the plaintiff attached some certified mail green (return) card copies to its written response to Defendant’s directed verdict motion at trial, the plaintiff never authenticated the cards or offered them in evidence at trial. As a result, the appeals court refused to consider the green cards as part of the appellate record. (An appeals court cannot consider documents that were not admitted into evidence at trial.)

In addition, the plaintiff’s trial testimony was conflicting. The Plaintiff’s owner’s testimony conflicted with a 2014 affidavit of mailing prepared by one of Plaintiff’s employees.  This evidentiary dissonance failed to show the owner’s actual notice of the plaintiff’s lien notice.  As a result, the trial court found that the plaintiff failed to carry its burden of proving that it complied with its Act lien notice rules.

The court then rejected the subcontractor’s argument that the owner had actual notice of its work since it saw the plaintiff performing grading work on the property and the plaintiff sent regular invoices to the owner’s agent.  However, under Illinois law, the mere presence of or owner’s knowledge that a contractor on a job is not a valid substitute for the required statutory notice.

The court also nixed the subcontractor’s claim that the owner had actual notice of the subcontractor’s work based on the sworn statements submitted to the owner from the general contractor. While courts have upheld an otherwise deficient subcontractor lien notice where sworn statements in the record plainly show the subcontractor’s identity and amounts owed.  Here, there were no sworn statements in the record. A trial witness may only testify to matters on which he/she has personal knowledge. Ill. R. Evid. 602. Since the plaintiff didn’t call to testify the owner’s construction manager – the only one who supposedly received the GC’s sworn statements (that identified plaintiff) –  there was no competent evidence that the owner received and reviewed any sworn statements that referenced the plaintiff’s work and amounts owed.

Afterwords:

This case shows how unforgiving statutory notice requirements can be in the mechanics lien context.

In hindsight, the subcontractor plaintiff should have introduced certified mail receipts into evidence.

Failing that, it should have called the owner’s construction manager as an adverse agent to lock in testimony that the general contractor furnished the owner with sworn statements and those statements sufficiently identified the subcontractor plaintiff.

Limitation of Damages Clause Doesn’t Bar Trade Secrets, Copyright Claims – IL ND

A Federal district court in Illinois recently addressed the scope of a limitation of damages provision in a dispute over automotive marketing software. The  developer plaintiff in Aculocity, LLC v. Force Marketing Holdings, LLC, 2019 WL 764040 (N.D. Ill. 2019), sued the marketing company defendant for breach of contract – based on the defendant’s failure to pay for plaintiff’s software – and joined statutory copyright and trade secrets claims – based on the allegation that the defendant disclosed plaintiff’s software source code to third parties.

The defendant moved for partial summary judgment that plaintiff’s claimed damages were foreclosed by the contract’s damage limitation provision. The court denied as premature since no discovery had been taken on plaintiff’s claimed damages.

The agreement limited plaintiff’s damages to the total amount the software developer plaintiff was to be paid under the contract and broadly excluded recovery of any “consequential, incidental, indirect, punitive or special damages (including loss of profits, data, business or goodwill).”  The contractual damage limitation broadly applied to all contract, tort, strict liability, breach of warranty and failure of essential purpose claims.

In Illinois, parties can limit remedies and damages for a contractual breach if the agreement provision is unambiguous and doesn’t violate public policy.

Illinois law recognizes a distinction between direct damages and consequential damages. The former, also known as “general damages” are damages that the law presumes flow from the type of wrong complained of.

Consequential damages, by contrast, are losses that do not flow directly and immediately from a defendant’s wrongful act but result indirectly from the act. Whether lost profits are considered direct damages depends on their (the lost profits) degree of foreseeability. In one oft-cited case, Midland Hotel Corp. v. Reuben H. Donnelley Corp., 515 N.E.2d 61, 67 (Ill.1987), the Illinois Supreme Court held that a plaintiff’s lost profits were direct damages where the publisher defendant failed to include plaintiff’s advertisement in a newly published directory.

The District Court in Aculocity found that whether the plaintiff’s lost profits claims were direct damages (and therefore outside the scope of the consequential damages disclaimer) couldn’t be answered at the case’s pleading stage.  And while the contract specifically listed lost profits as an example of barred consequential damages, this disclaimer did not apply to direct lost profits. As a result, the Court denied the defendant’s motion for partial summary judgment on this point. [*3]

The Court also held that the plaintiff’s statutory trade secrets and copyright claims survived summary judgment. The Court noted that the contract’s damage limitation clause spoke only to tort claims and contractual duties. It was silent on whether the limitation applied to statutory claims – claims the court recognized as independent of the contract. [*4] Since the clause didn’t specifically mention statutory causes of action, the Court refused to expand the limitation’s reach to plaintiff’s copyright and trade secrets Complaint counts.

Take-aways:

Aculocity and cases like it provide an interesting discussion of the scope of consequential damage limitations in the context of a lost profits damages claim. While lost profits are often quintessential consequential damages (and therefore defeated by a damage limitation provision), where a plaintiff’s lost profits are foreseeable and arise naturally from a breach of contract, the damages will be considered general, direct damages that can survive a limitation of damages provision.

High-Tech Sports Equipment Plaintiff Alleges Viable Fraud Claim Against Electronic Sensor Supplier (Newspin v. Arrow – Part II)

In Newspin Sports, LLC v. Arrow Electronics, Inc., 2018 WL 6295272, the Seventh Circuit affirmed the dismissal of plaintiff’s negligent misrepresentation claims but upheld its fraud claims.

Under New York law (the contract had a NY choice-of-law provision), a plaintiff alleging negligent misrepresentation must establish (1) a special, privity-like relationship that imposes a duty on the defendant to impart accurate information to the plaintiff, (2) information that was factually inaccurate, and (3) plaintiff’s reasonable reliance on the information.

New York’s economic loss rule softens the negligent misrepresentation theory, however. This rule prevents a plaintiff from recovering economic losses under a tort theory. Since the plaintiff’s alleged negligence damages – money it lost from the flawed electronic components – mirrored its breach of contract damages, the negligent misrepresentation claim was barred by the economic loss rule. [*10]

Plaintiff’s fraud claims fared better.  In New York, a fraud claim will not lie for a simple breach of contract.  That is, where the only “fraud” alleged is a defendant’s broken promise or lack of sincerity in making a promise, the fraud claim merely duplicates the breach of contract one.

To allege a fraud claim separate from a breach of contract, a plaintiff must establish (1) a legal duty separate from the duty to perform under a contract, or (2) demonstrate a misrepresentation collateral or extraneous to the contract, or (3) special damages caused by the misrepresentation that are not recoverable as contract damages. [*11] [32]-[33].

Applying these principles, the Court noted that the plaintiff alleged the defendant made present-tense factual representations concerning its experience, skill set and that its components met plaintiff’s specifications.  Taken together, these statements – if true – sufficiently pled a legal duty separate from the parties’ contractual relationship to state a colorable fraud claim.

The Court also rejected the defendant’s argument that the plaintiff’s fraud claims were subject to the UCC’s four-year limitations period governing sales of goods contracts.  Since the plaintiff’s fraud count differed from its breach of contract claim, Illinois’s five-year statute of limitations for common law fraud governed.  See 735 ILCS 5/13-205,  As a result, plaintiff’s 2017 filing date occurred within the five-year time limit and the fraud claim was timely. [*12] [35].

Afterwords:

The economic loss rule will bar a negligent misrepresentation claim where a plaintiff’s pleaded damages simply restate its breach of contract damages;

A fraud claim can survive a pleadings motion to dismiss so long as the predicate allegations go beyond the subject matter of the contract governing the parties’ relationship.