Statute of Frauds’ ‘Goods Over $500’ Section Dooms Car Buyer’s Oral Contract Claim (IL First Dist.)

I’ve written here before on the Statute of Frauds (SOF) and how it requires certain contracts to be in writing to be enforceable.  I’ve also championed “MYLEGS” as a useful mnemonic device for dissecting a SOF issue.

M stands for ‘Marriage’ (contracts in consideration of marriage), Y for ‘Year’ (contracts that can’t be performed within the space of a year must be in writing), L for ‘Land’ (contracts for sale of interest in land), E for ‘Executorship’ (promises by a executor to pay a decedent’s creditor have to be in writing), G is for ‘Goods’ (contracts to sell goods over $500) and S for ‘Surety’ (a promise to pay another’s debt requires a writing).

The First District recently affirmed the trial court’s dismissal of a breach of contract based on the Uniform Commercial Code’s (UCC) SOF provision governing the sale of goods for over $500 (the “G” in the above MYLEGS scheme).

The plaintiff in Isenbergh v. South Chicago Nissan, 2016 IL App(1st) 153510 went to a car dealer defendant to buy a new Nissan Versa (Versa 1) with specific features (manual transmission, anti-lock brakes, etc.).  When told the requested car wasn’t in stock, the plaintiff opted to rent a used car temporarily until the requested car was available.  But instead of renting a used car, the Plaintiff alleged the dealership convinced him to enter into a verbal “Return Agreement” for a substitute Versa (Versa 2). 

Under the Return Agreement, the dealership promised to sell the plaintiff Versa 2 – which didn’t have plaintiff’s desired features – and then buy it back from Plaintiff when Versa 1 was in stock.  According to Plaintiff, the Return Agreement contemplated Plaintiff’s total payments on Versa 2 would equal only two months of sales contract installment payments.

Plaintiff claimed the dealership refused to honor the Return Agreement and Plaintiff was stuck making monthly payments on Versa 2 (a car he never wanted to begin with) that will eventually eclipse $28,000.  The trial court granted defendant’s Section 2-619 motion to dismiss Plaintiff’s breach of contract action based on the SOF.

Held: Affirmed.

Reasons:

The SOF requires that a contract for the sale of goods for the price of $500 or more be in writing to be enforceable. 810 ILCS 5/2-201.  A “contract for sale” includes both a present sale of goods as well as a contract to sell goods in the future.  A “sale” is the passing of title from seller to buyer for a price. 810 ILCS 5/2-106, 103.  “Goods” under the UCC are all things “movable” at the time of identification to the contract for sale. 810 ILCS 5/2-105.

The Return Agreement’s subject matter, a car, clearly met the UCC’s definitions of “goods” and the substance of the Return Agreement was a transaction for the sale of goods.  (The dealership promised to buy back Versa 2 from the Plaintiff once Versa 1 (the car Plaintiff wanted all along) became available.

Since Versa 2’s sale price was over $26,000 and plaintiff’s two payments under the Versa 2 purchase contract exceeded $1,100, Versa 2 easily met the SOF’s $500 threshold. Because of this, the Court found that the SOF defeated plaintiff’s claim for breach of an oral agreement to buy and sell a car selling for well over $500.

Afterwords:

This case presents a straightforward application of the SOF section governing the sale of goods that retail for at least $500.  Clearly, a motor vehicle is a movable “good” under the UCC and will almost always meet the $500 threshold by definition.

The case also makes clear that even if the contract contemplates a future sale and purchase (as opposed to a present one), the UCC still governs since the statute’s definition of sales contract explicitly speaks to contracts to sell goods in the future.

Finally, the case is a cautionary tale for car buyers and sellers alike as it shows that oral promises likely will not be enforced unless reduced to writing.

Three-Year Limitations Period Governs Bank Customer’s Suit for Misapplied Deposits – IL First Dist.

Now we can add PSI Resources, LLC v. MB Financial Bank (2016 IL App (1st) 152204) to the case canon of decisions that harmonize conflicting statutes of limitations and show how hard it is for a corporate account holder to successfully sue its bank.

The plaintiff, an assignee of three related companies**, sued the companies’ bank for misapplying nearly $400K in client payments over a several-year period.  The bank moved to dismiss, arguing that plaintiff’s suit was time-barred by the three-year limitations period that governs actions based on negotiable instruments.***  The court dismissed the complaint and the plaintiff appealed.

Held: Affirmed

Reasons:

The key question was whether the Uniform Commercial Code’s three-year limitations period for negotiable instrument claims or the general ten-year period for breach of written contract actions applied to the plaintiff’s negligence suit against the bank.  The issue was outcome-determinative since the plaintiff didn’t file suit until more than three years passed from the most recent misapplied check.

Illinois applies a ten-year limitations period for actions based on breach of written contract.  735 ILCS 5/13-206.  By contrast, an action based on a negotiable instrument is subject to the shorter three-year period.  810 ILCS 5/4-111.

If the subject of a lawsuit is a negotiable instrument, the UCC’s three-year time period applies since UCC Article 4 actions based on conversion and Article 3 suits for improper payment both involve negotiable instruments.  810 ILCS 5/3-118(g)(conversion); 810 ILCS 5/4-111 (improper payment).

Rejecting plaintiff’s argument that this was a garden-variety breach of contract action to which the ten-year period attached, the court held that since plaintiff’s claims were essentially based on banking transactions, the three-year limitations period for negotiable instruments governed. (¶¶ 36-38)

Where two statutes of limitations arguably apply to the same cause of action, the statute that more specifically relates to the claim applies over the more general statute.  While the ten-year statute for breach of written contracts is a general, “catch-all” limitations period, section 4-111’s three-year rule more specifically relates to a bank’s duties and obligations to its customers.

And since the three-year rule was more specific as it pertained to the plaintiff’s improper deposit and payment claims, the shorter limitations period controlled and plaintiff’s suit was untimely.

The court also sided with the bank on policy grounds.  It stressed that the UCC aims to foster fluidity and efficiency in commercial transactions.  If the ten-year period applied to every breach of contract action against a bank (as plaintiff argued), the UCC’s goal of promoting commercial finality and certainty would be frustrated and possibly bog down financial deals.

The other plaintiff’s argument rejected by the court was that the discovery rule saved the plaintiff’s lawsuit.  The discovery rule protects plaintiffs who don’t know they are injured.  It suspends (tolls) the limitations period until a plaintiff knows or should know he’s been hurt.  The discovery rule standard is not subjective certainty (“I now realize I have been harmed,” e.g.).  Instead, the rule is triggered where “the injured person becomes possessed of sufficient information concerning his injury and its cause to put a reasonable person on inquiry to determine whether actionable conduct is involved.” (¶ 47)

Here, the evidence was clear that plaintiff’s assigning companies received deposit statements on a monthly basis for a several-year period.  And the monthly statements contained enough information to put the companies on notice that the bank may have misapplied deposits.  According to the court, these red flags should have motivated the plaintiff to dig deeper into the statements’ discrepancies.

Take-aways:

This case suggests that an abbreviated three-year limitations period applies to claims based on banking transactions; even if a written contract – like an account agreement – is the foundation for a plaintiff’s action against a bank.  A plaintiff with a possible breach of contract suit against his bank should take great care to sue within the three-year period when negotiable instruments are involved.

Another case lesson is that the discovery rule has limits.  If facts exist to put a reasonable person on notice that he may have suffered financial harm, he will be held to a shortened limitations period; regardless of whether he has actual knowledge of harm.

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**  The court took judicial notice of the Illinois Secretary of State’s corporate registration database which established that the three assigned companies shared the same registered agent and business address.

*** 810 ILCS 5/3-104 (“negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.)

 

“Mirror-Image” Contract Acceptance: 7th Circuit Finds Attorneys’ Fees Provision in Invoice Not Binding on Food Buyer

VLM Food Trading International, Inc. v. Illinois Trading Co., (http://cases.justia.com/federal/appellate-courts/ca7/14-2776/14-2776-2016-01-21.pdf?ts=1453404644) considers whether a seller can recover attorneys’ fees where the contract doesn’t provide for fees but the invoices sent after the goods are shipped do have fee-shifting language.   

The Seventh Circuit held that the invoice fee-shifting clause does not bind the buyer.

The Contract Chronology: The plaintiff foods seller would submit a purchase order to defendant that stated the product, price, quantity and delivery locus.  The defendant, in turn, would send a confirming e-mail to the plaintiff.  After that, the plaintiff shipped the goods to the defendant and later sent a “trailing” invoice to the defendant.

The first appearance of the fee-shifting language in the contracting sequence were found in the trailing invoices sent after the seller’s items were shipped to the defendant.

The main dispute centered on when the contract was formed and whether the trailing invoices’ fees provisions were part of the contract. 

An international treaty – the U.N. Convention on Contracts for the International Sale of Goods (the “Convention”) – happened to govern this dispute.  The Convention applies a derivation of the common law “mirror image” rule of contract interpretation: an acceptance must “mirror” the offer or else it’s construed as a counter-offer.  

Under the mirror image rule, any additional terms or qualifications to the offer are considered proposed modifications.  A party doesn’t have to object to a proposed modification to exclude (reject) it.  Any term not contained in the offer and acceptance simply do not bind the parties.  What’s more, one’s silence or inactivity doesn’t equal acceptance of the proposed offer changes.  A party can only accept the terms through a statement or conduct.

The Seventh Circuit held that the plaintiff’s purchase orders were the offer, and the buyer’s confirming e-mails were the acceptance.  Any terms proposed outside the scope of the purchase orders or emails were not part of the parties’ agreement.  Since the plaintiff’s trailing invoices (and their fee-shifting and interest language) were sent after the acceptance, they didn’t bind the buyer.

The Court rejected the plaintiff’s trade usage argument – that buyer assented to the fee provision by not objecting to the invoice language.  Again, under the mirror image rule, the buyer’s silence isn’t considered acceptance.  The Court also found that trade usage only applies where there is contractual ambiguity.  Here, the contract was clear and so there was no reason to consider any course of conduct or trade usage evidence.

Finally, the Court found the defendant did not manifest an intent to adhere to the invoice fee language.  The key factor on this point was the trailing invoices were sent to defendant’s generic billing address; they weren’t sent to a specific corporate decision-maker. 

Take-aways:

VLM is interesting reading to me since I’ve encountered this exact fact pattern several times through the years in my commercial litigation practice.  The case chronicles a typical multi-step goods contract involving commercial entities.  

In a case where an international treaty doesn’t govern, fee language can be considered part of the contract under the Uniform Commercial Code if it is standard practice in an industry to have after-the-fact fee provisions in invoices or the parties’ course of conduct shows an intent to hew to the invoice fee-shifting clause. 

VLM offers a useful analysis of the factors a court considers when determining whether after-the-fact contractual terms can bind the parties.