Discovery Rule Saves Plaintiffs’ Fraud Claims Against Investment Firm (IL – 2d Dist)

Rasgaitis v. Waterstone Financial Group, Inc., 2012 IL App (2d) 111112-U, a 20-plus page Second District case, presents a detailed synopsis of Illinois agency law, the discovery rule and the “forward-looking” fraud rule (statements of future intent or opinion do not equal fraud).

Facts: The plaintiffs sued the defendant financial services firm and two of its agents for fraud and other tort claims based on defendants’ misrepresentations in connection with selling investment and insurance products to plaintiffs.  (¶ 10).  Defendants moved to dismiss, arguing that the claims were time-barred, were non-actionable statements of future intent and was too conclusory to show an agency relationship between the individuals and the investment firm.  The trial court agreed and dismissed all 15 complaint counts.

Held: The Second District reversed the trial court on 14 of the 15 counts (the Court sustained dismissal of negligent supervision claim based on economic loss rule) and held that plaintiffs’ suit was timely based on the discovery rule.

Reasoning:

The discovery rule stops the running of the statute of limitations until a plaintiff knows or should know of his injuries and that the injuries were caused by defendant’s wrongful conduct. (¶ 31).  The rule generally presents a fact question (the question being – when did the plaintiff reasonably know he was injured?) but can be an issue of law where the key facts are undisputed.  Id.

Here, the Court held that while the defendants’ underlying misrepresentations were made in 2005 and 2006, and plaintiffs didn’t sue until 2010, the plaintiffs still pled they didn’t learn of the false promises until 2009 when they learned that the chosen investment vehicle wasn’t as good as advertised.  And since plaintiffs filed suit approximately 14 months after they discovered the defendants’ wrongful conduct (in April 2010) – the complaint was timely under the two and three-year limitations periods for suits based on the sale of life insurance policies and annuities.  ¶¶ 24, 32,  735 ILCS 5/13-214.4, 815 ILCS 5/13.

Fraud Claim Analysis

The Second District also sustained plaintiffs’ fraud claims against defendants’ various Section 2-615 arguments.  While acknowledging that statements of opinion, future intent or financial projections are generally not actionable, the Court focused on the context, not the content of defendants’ statements.  (¶ 43)  The Court held that the plaintiffs sufficiently alleged that the defendants’ statements (that plaintiffs’ funds were 100% safe and the investment plan was proven to be successful) were sufficiently factual to state statutory and common law fraud claims under Illinois pleading rules. (¶ 44).

 Agency Analysis

Sustaining the plaintiffs’ agency allegations (and therefore upholding the claims against defendants’ 2-615 motion attack), the Court provided an agency law primer:

– agency is a fiduciary relationship where the principal can control the agent’s conduct and the agent can act on the principal’s behalf;

– an agent’s authority can be actual or apparent;

– actual authority can be express or implied;

– express authority = principal explicitly grants the agent authority to perform a given act;

implied authority = actual authority proved by circumstantial evidence of the agent.  That is, the principal’s conduct reasonably leads the agent to believe that the principal wants the agent to act on the principal’s behalf;

– apparent agency = principal holds out agent as having authority to act on principal’s behalf and a reasonably prudent third party would assume the agent’s authority based on the principal’s conduct.

(¶¶ 49-51).

Applying these rules, the Court held that the plaintiffs pled sufficient facts to establish an agency relationship between the two individual financial agents and the investment firm.  Factors the court considered in its agency calculus included that the defendants used the corporate employer’s offices, business cards and same phone number. ¶ 51.  The Court also cited the fact that plaintiffs had multiple meetings with the individual defendants at the corporate defendant’s office – something that would likely lead a reasonable person to assume that the individual defendants were authorized to act for the corporate principal.  As a result, plaintiffs’ stated colorable claims under Illinois fact-pleading rules.  14 of plaintiff’s 15 claims were reinstated.

Take-aways: The discovery rule applies to common law and consumer fraud claims.  The more detailed a plaintiff’s allegations, the better chance they will survive a limitations defense.  Fraud claims cannot be based on future intent, opinions or financial forecasts unless the statements are sufficiently present-tense and factual.   The case is also instructive on what agency allegations will and won’t satisfy Illinois fact-pleading rules where a plaintiff attempts to impute an agent’s conduct to a corporate principal.

Third-Party Beneficiary Claims in Public Construction Contracts – Illinois Law

Lake County Grading Company, LLC v. The Village of Antioch, 2013 IL App (2d) 120474, 985 N.E.2d 638 (2nd Dist. 2013), illustrates the importance of joining an alternative common law claim with a statutory one when the statutory claim  is time-barred.

The plaintiff subcontractor sued a public entity under a third-party beneficiary theory for improvements plaintiff made to two residential subdivisions.  After the general contractor who hired plaintiff defaulted and filed for bankruptcy, the plaintiff sued the public entity under the Public Construction Bond Act, 30 ILCS 550/1 and the Mechanics’ Lien Act, 770 ILCS 60/23 and also brought claims for third-party beneficiary breach of contract. 

The lien and Bond Act claims were dismissed and the trial court granted summary judgment for the plaintiff on its third-party beneficiary claims.

Affirming the trial court, the First District rejected the Village defendant’s argument that plaintiff’s sole remedy was under the Bond Act.  The Bond Act requires a subcontractor like plaintiff to serve a verified notice within 180 days of the completion of its work and to file suit within one year after the public entity accepts the project.  30 ILCS 550/1, 2; Lake County, ¶¶ 17-19. 

Siding with the plaintiff, the Court noted that Bond Act states that the Act’s statutory remedy is “in addition to and independent of any other rights and remedies provided at law or in equity”.  Id., ¶ 20.  The Court then stated some key third-party beneficiary rules:

a person’s status as a third-party beneficiary turns on whether the contract language shows that the parties’ intent was to directly benefit the supposed third-party plaintiff;

– the contract language must show that the contract was made for the direct, not merely incidental benefit of the third party;

– the intent to directly benefit a third party must be shown by express provision in the contract identifying the third-party beneficiary by name or description of a class to which the third party belongs;

– if a contract makes no mention of the plaintiff or a class to which he belongs, he is not a third-party beneficiary of the contract;

– the plaintiff bears the burden of showing that the contracting parties intended to confer a benefit on him.

( ¶ 24)

Applying these rules, the Second District found that the plaintiff was a direct third-party beneficiary under both the Bond Act – which is “read into” the prime contract and the prime contract itself. Read together, the two documents clearly conferred third-party beneficiary status on plaintiff. (¶¶ 26-27).

Once the Court found that plaintiff was a third-party beneficiary of the prime contract, the Court applied Illinois’ four-year limitations period for construction-related claims (see 735 ILCS 5/13-214) instead of the Bond Act’s shortened 180 day/one-year limitations period. (¶ 31). 

The Court also declined to apply the Bond Act’s 180-day notice period was because the Village failed to require the general contractor to tender a payment bond as required by the Bond Act.  (¶ 25)  Since the Village failed to require a payment bond of the general contractor, there was no bond for the plaintiff to sue on.  This rendered the 180-day rule inapplicable.

Take-aways

The case illustrates that where a subcontractor blows the 180-day Bond Act notice rule, he can still sue as a third-party beneficiary of the prime contract.  

This case also makes clear that the party suing as a third-party beneficiary must demonstrate that the contract language clearly shows that the plaintiff is an intended, direct contract beneficiary.  Finally, the case provides an interesting contrast to the Mechanics’ Lien Act cases that hold that a subcontractor’s exclusive remedy against an owner is a statutory mechanics’ lien foreclosure suit. 

Illinois’ Contribution Claims In light of the ‘Savings’ Statute

Illinois has a 2 year statute of limitations (SOL) for contribution claims.  Contribution applies where two or more defendants have common liability to an injured plaintiff.  740 ILCS 100/1 (Illinois’s contribution statute).

The idea is that each defendant responsible for injuring a plaintiff should pay his share of liability to the plaintiff.  Section 13-204(b) of the Code prescribes the two year limitations period for contribution claims.

Another section of the Code of Civil Procedure, 735 ILCS 5/13-207 – labelled the “savings statute” – gives a defendant extra time to file an otherwise time-barred counterclaim or set-off under certain circumstances.

This statute protects against last minute filings by plaintiffs that would prevent a defendant from having a reasonable opportunity to assert counterclaims against that plaintiff.

Example: Assume plaintiff has personal injury claim against defendant and defendant has defamation claim against plaintiff arising from same underlying facts.  Illinois has a 2 year limitations period for personal injury claims (735 ILCS 5/13-202) and 1 year period for defamation (735 ILCS 5/13-201).  If plaintiff files personal injury suit on day 729 after he is injured and serves defendant some weeks later, the defendant’s defamation counterclaim would normally be barred since well over 1 year has elapsed from the underlying injury.  But, under the savings statute, the defendant now has 1 year from the date of service of plaintiff’s complaint to sue for defamation.

But consider this fact pattern: plaintiff serves defendant 1 on January 1, 2013 and serves defendant 2 on January 15, 2013.  Defendant 1 does not file any counterclaims.  Defendant 2 sues defendant 1 for contribution on January 14, 2015, the day before the 2-year SOL expires and defendant 1 is served on February 1, 2015.

Q:  Can defendant 1 now file a counterclaim for contribution against defendant 2 on or after February 1, 2015? Remember, defendant 1 was served with the underlying complaint on January 1, 2013 – so under 13-204(b)(see above), defendant 1 would have had until January 1, 2015 to file contribution counterclaims.  Clearly, defendant 1’s contribution action is time-barred by the 2-year SOL, right?

A: Wrong.  An off-shoot of the above fact pattern is exactly what the Illinois Supreme Court addressed in Barragan v. Casco case, 216 Ill.2d 435 (2005).  There, the Court reversed the Appellate Court and held that a contractor’s contribution counterclaim against a co-defendant architect could proceed even though it was time-barred under 13-204’s two-year SOL for contribution claims.

In Barragan, the plaintiff served the defendant contractor on July 25, 1997 and the defendant architect on September 15, 1997.  Under 13-204(b), the contractor and architect would have until July 25, 1999 and September 15, 1999 respectively to sue for contribution..  The architect filed its contribution claim against the contractor on July 29, 1999 – about six weeks before the 2-year limitations period expired.  The contractor filed its responsive contribution claim against the architect in December, 2000 – about 3.5 years after it was served by the underlying plaintiff and 16 months after the contribution 2-year limitations period expired.

The Court still permitted the contractor’s counterclaim to go forward under Code Section 13-207, the savings provision.  The  Court ruled that Section 13-207’s savings provision trumped the two-year SOL contained in Section 13-204(b) for contribution claims, noting that the contractor and architect were in an adversarial posture and that the contractor’s counterclaim was responsive to the architect’s.

Take-away: Personal injury defendants should be cognizant of Barragan and the interplay between 13-204 and 13-207.  If you – as a defendant – sue another defendant for contribution, be prepared for that defendant to counter-sue you for contribution beyond the 2-year limitations period.  This seems to penalize the timely filing defendant by allowing the contribution counter-defendant to circumvent the 2-year SOL for contribution.