Federal Court Applies IL Tortious Interference Rules and the Statute of Frauds in Railcar Lease Dispute

trainThe Northern District of Illinois recently discussed the pleading and proof elements of tortious interference with contract and the promissory estoppel doctrine in a commercial railcar lease dispute. In Midwest Renewable Energy, LLC v. Marquis Energy-Wisconsin, LLC 2014 WL 4627921 (N.D. Ill. 2014), the plaintiff sublessor of railcars sued the sublessee for damages after the plaintiff’s lessor terminated a lease (“Master Lease”) for the same cars.  The sublessee moved for summary judgment.

Result: Motion granted.  Plaintiff’s tortious interference and promissory estoppel claims are defeated.

Q: Why?

A: After the railcar lessor terminated the Master Lease with the plaintiff and started dealing directly with the sublessee, the plaintiff sued it’s sublessee for tortious interference and promissory estoppel. Granting summary judgment for the sublessee , the Court enunciated the key tortious interference with contract elements under Illinois law.

Tortious Interference with Contract

A tortious interference with contract plaintiff must show (1) the existence of a valid and enforceable contract between the plaintiff and another, (2) the defendants’ awareness of the contract, (3) the defendants’ intentional and unjustified inducement of a breach of the contract, (4) subsequent breach of the contract caused by the defendants’ wrongful conduct, and (5) damagesIf a plaintiff fails to perform its contractual obligations, it can’t prove breach and its tortious interference claim will fail.

Here, the plaintiff’s tortious interference claim failed because it couldn’t show that its lessor breached the Master Lease. The plaintiff actually breached it by subletting it to defendant without the (Master) lessor’s knowledge and consent (the Master Lease required the lessor’s consent to any sublease or assignment) and also by failing to make several months’ of railcar lease payments.  Since the lessor was able to terminate the lease on plaintiff’s breach, the plaintiff failed to establish that the lessor breached – an essential tortious interference element.

Promissory Estoppel

Next, the Court rejected the plaintiff’s promissory estoppel count. Plaintiff predicated this claim on the defendant/sublessee’s promise to buy out plaintiff’s rights under the Master Lease.

Promissory estoppel is a doctrine under which the plaintiff may recover without the presence of a contract. To prove promissory estoppel, a plaintiff must show (1) defendant made n unambiguous promise to plaintiff, (2) plaintiff relied on such promise, (3) plaintiff’s reliance was expected and foreseeable by defendants, and (4) plaintiff relied on the promise to its detriment.  Aspirational negotiations or proposals don’t equate to a clear promise under the doctrine.

Plaintiff’s promissory estoppel claim failed because it couldn’t show a clear promise by the defendant to buy out plaintiff’s Master Lease rights. The evidence reflected that any lease buy-out talks were merely negotiations; not ironclad promises.

The promissory estoppel clam was also defeated by the statute of frauds – which requires certain contracts to be in writing.  Under Section 2A of the UCC, lease contracts for goods (like railcars) have to be in writing unless the total lease payments are less than $1,000.  810 ILCS 5/2A–201(1). Where the statute of frauds applies, to a contract, it also requires an assignment of the contract to be in writing and signed by the party being sued.

Here, since the statute of frauds applied to the Master Leases and well over $1,000 was at stake, any assignment from plaintiff to defendant of the Master Lease had to be in writing.  The Court rejected the plaintiff’s claim that several e-mail exchanges with the sublessee satisfied the statute’s writing requirement.  The Court found that since the none of the emails contained the contract parties, subject matter or price term of the supposed assignment agreement, the sporadic emails didn’t meet the writing requirement. (*5).

Take-aways: The case is post-worthy for its discussion of the key tortious interference with contract elements and how important it is for a plaintiff to show that it complied with the contract it is claiming was wrongfully interfered with. The case also provides good summary of promissory estoppel elements and cements the proposition that the statute of frauds will still apply to bar the claim if the subject matter is one that has to be in writing under the law.  Finally, this case amplifies the importance of careful lease drafting and review.  Parties to lease agreements – whether for real estate or tangible goods – should be cognizant of assignment and sublease provisions.  They almost always require the prime lessor’s knowledge and written consent.

 

 

 

 

 

BMW Dealership Defeats Fraud Suit On Statute of Limitations Grounds (ND IL)

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Occasionally, I’ll have a case that appears to be governed by two or more conflicting statutes of limitations.  For example, one statute will give a plaintiff four years to file suit while an apparently equally applicable one compresses the time to sue to two years.  As plaintiff, I usually (not always) argue for the longer limitations period to apply, while as defendant, I want the shortened time span (so I can move to dismiss the too-late complaint).  

In Belsky v. Fields Imports, Inc., 2013 WL 5819232 (N.D.Ill. 2013), the Northern District methodically analyzes which of two seemingly applicable (and conflicting) limitations periods (is it 10 years or 4 years?) applies to a breach of contract suit involving a defective motor vehicle.

Facts:

Plaintiff sued a car dealership and warranty service administrator for breach of various written agreements generated in connection with plaintiff’s purchase of a BMW.  Plaintiff bought the  car in 2005 and bought the service contract – which provided for repair and replacement of specified car parts – in 2009.  Plaintiff alleged that in 2012 she noticed that the car had a defective engine bolt.  When the defendants failed to provide warranty coverage for the bolt problem, plaintiff sued under state law breach of contract theories.  Defendants’ filed separate Rule 12(b)(6) motions to dismiss plaintiff’s complaint.  The court granted the motion and dismissed all counts of plaintiff’s complaint with prejudice.

Q: Why?

A: Plaintiff’s breach of contract claims against the dealership failed for two reasons: (1) the claims were time-barred; and (2) plaintiff failed to allege which part of the sales contract the dealer breached.  The court held that the four-year limitations period set forth in Uniform Commercial Code (“UCC”) Section 2-725 (810 ILCS 5/2-725) governed the plaintiff’s sales contract count. 

The UCC applies to “sales” transactions involving “goods” and Section 2-725 simply provides that “an action for breach of any contract for sale must be commenced within 4 years after the cause of action accrued“.  Belsky, *3, 810 ILCS 5/2-725(1).   There is also no “discovery rule”: the four year time limit applies regardless of whether the plaintiff lacked knowledge of the breach.  810 ILCS 5/2-725(2). 

Plaintiff argued that Illinois’ ten-year limitation period for written contract applied.  See 735 ILCS 5/13-206.  But the Court sided with defendants and applied the shorter four-year limitations period.  It held that the BMW, a car, clearly met the UCC’s definition of “goods” (a “thing” that was “moveable” at contract inception) and involved a “sale” (passing of title from seller to buyer for a price).  *3 (UCC Section 2-105(1)(goods definition); UCC Section 2-106(1)(sale def.). 

In addition, Code Section 13-206 (the ten-year statute for written contracts) expressly exempts claims under UCC Section 2-725 (the four-year rule) from its scope.  Section 13-206’s lead-in provides “except as provided in Section 2-725 of the Uniform Commercial Code…”.   Applying the four-year limitation, the Court held that the plaintiff’s breach of contract claims were three years too late and dismissed the case.  *3.

In dismissing the plaintiff’s service contract claims, the Court relied on agency law.  It held that the dealer entered into the contract on behalf of a disclosed principal (the warranty administrator).  Black letter agency rules dictate that an agent (here, the dealer) of a disclosed principal (the administrator) isn’t liable on contracts entered into for its principal.  *7.   The Court also dismissed the plaintiff’s service contract claim against the administrator because like the sales contract, the service contract also specifically excluded engine bolt defects from its coverage.  *9-10.

Take-aways: Where two conflicting limitations periods potentially control, the one that more specifically matches the facts will govern.  A contract for the sale of a “good” (like a car) will trigger the UCC’s four-year time span rather than the ten-year rule for written contracts. 

Also, a contractual disclaimer, if easy to read and find, will be upheld.