Commercial Lessor’s Acceptance of Rent After Lease Termination Notice Doesn’t Waive Termination

 Z&S Corp. v. Fill & Fly, Inc., 2014 IL App (3d) 130253-U examines whether a commercial lessor, who serves a 30-day notice to terminate an oral month-to-month lease, waives the termination  by accepting rents after the notice period expires.  The case also addresses what factual elements a plaintiff must prove to prevail on a specific performance claim under Illinois law.

The defendant operated gas stations on two properties owned by the plaintiff since 2008.  And while they had discussed the defendant’s purchase of the sites at various times – most recently in 2009 – they were operating under a verbal month-to-month tenancy pursuant to which the tenant paid monthly rents and real estate taxes to the plaintiff landlord.  When tenant defaulted under the oral lease, plaintiff served a 30-day notice (on February 28, 2012) to terminate the tenancy (effective March 31, 2012) and eventually filed a forcible suit seeking possession of both properties.  After the 30-day termination period expired, plaintiff accepted some rent payments from the tenant defendant.

The tenant filed a 2-619 motion to dismiss the forcible action on the basis that the landlord waived the 30-day termination notice by accepting rents after March 31, 2012 – the 30 day notice period’s expiration.  735 ILCS 5/9-207 (month-to-month tenancy terminable on 30 days’ notice); See  http://paulporvaznik.com/how-to-terminate-periodic-tenancies/23,

The trial court rejected this argument and denied the tenant’s motion on the basis that the parties were actively engaged in settlement talks and so the landlord’s lease termination notice wasn’t waived when the landlord accepted post-termination rents.  After a bench trial, the trial court found in favor of the plaintiff and awarded it possession of the properties.  The  trial court also entered judgment for plaintiff on the tenant’s specific performance counterclaim – which sought to enforce an earlier purchase contract for the sites – on the basis that the purchase contract lapsed.  The tenant appealed both the denial of its 2-619 motion and the trial result.  Z & S, ¶¶ 21-22.

The Third District affirmed the trial court.  On the termination notice issue, the Court held that a landlord’s acceptance of rent after a termination date usually results in a waiver of the notice.  Z & S, ¶ 30; Bismark Hotel Co. v. Sutherland, 92 Ill.App.3d 167, 173 (1980).  But Illinois case law provides that if the parties are involved in active settlement negotiations at the time the landlord accepts the rent payment, the landlord’s acceptance of the rent won’t waive the lease termination.  Z & S, ¶ 30; Yarc v. American Hospital Supply Corp., 17 Ill.App.3d 667, 671 (1974).  Here, since the record evidence demonstrated that the parties were engaged in settlement talks, the landlord’s acceptance of rent after the 30-day notice period ended didn’t nullify the notice.

The Court also upheld the trial verdict in landlord’s favor on the tenant’s specific performance claim. The tenant was trying to enforce a 2009 purchase contract for the two gas station properties.  A key component of a specific performance claim is whether the claimant (1) has complied with all terms of the contract or (2) was ready, willing and able to complete the contract but was prevented from doing so by the opposing party. Z & S, ¶ 37; Maywood Proviso State Bank v. York State Bank and Trust Co., 252 Ill.App.3d 164, 171 (1993).

The defendant’s failure to establish either element doomed its specific performance claim.  The trial evidence demonstrated that the defendant’s failure to pay real estate taxes on the properties – as required under the lease and aborted purchase contract – was the reason the properties’ mortgage lender wouldn’t permit defendant to assume the existing mortgages on the sites and consummate the purchase.  Also, the Court noted that the defendant’s principal’s trial testimony established that he was unable to complete financing for the purchase of the properties because he didn’t have a green card.  Without a green card, the bank wouldn’t allow the defendant to complete the purchase transaction.  Taken together, the evidence clearly demonstrated that the tenant couldn’t prove either that he complied with the purchase contract or was prevented from doing so by the plaintiff. Z & S, ¶¶ 37-39.

Z & S is useful for its discussion of how to terminate a month-to-month commercial lease and when a landlord can still accept rent payments after a termination notice lapses.  The case also shows that to plead and prove specific performance, a litigant must show that he either complied with the contract terms or stood ready to but was impeded by some act of the other contracting party.

 

Record Company’s Injunction Attempt Against Rock Band Fails

Victory Records’ attempt to prevent the rock band A Day to Remember (ADTR) from releasing an album in the Fall of 2013 failed because it couldn’t establish the elements for injunctive relief under Illinois law.

In Woodard v. Victory Records, 2013 WL 5517926 (N.D.Ill. 2013), the defendant record company (“Victory” or the “Record Company”) sued to prevent the Florida pop-punk quartet from self releasing its Common Courtesy record.

The Court denied the Victory’s request to block the band’s album release.

To get a temporary restraining order, a plaintiff must show:

  • irreparable harm,
  • an inadequate remedy at law,
  • a likelihood of success on the merits;
  • the harm that will result if the injunction isn’t entered will outweigh harm to the opposing side if the injunction is entered.  *2.   

Victory established a likelihood of success on the merits.  “This is not a high burden.”  All the movant must show is a “better than negligible” chance of winning on the merits.

The crux of the dispute was the parties’ differing interpretations of the word “album” as it was used in the contract. 

The Court found the term ambiguous and each side’s interpretation was plausible.  ( *3).  Because each side’s reading of the contract had facial validity, the Record Company demonstrated a better than negligible chance of prevailing on the merits.

Irreparable harm denotes “likely” injury that is “real” and “immediate”, not “conjectural or hypothetical.”

The movant has to show money damages would not adequately remedy the harm suffered without an injunction.  ( *3).

Here, Victory couldn’t establish likely irreparable harm or an inadequate remedy at law because ADTR was a known quantity. 

ADTR had released several successful albums under the Victory label.  Because of this, Victory could gauge any lost profits resulting from ADTR’s independent album release. 

This ability to extrapolate the album’s likely profits from ADTR’s prior sales meant Victory had an adequate legal remedy (e.g. a suit for money damages) for breach of the recording contract. 

The Court also rejected Victory’s reputational harm argument – that if ADTR is allowed to self-release an album and the album is flawed and doesn’t sell, Victory’s reputation will suffer.  The Court held that since ADTR was perennially successful and had a wide fan base, it wasn’t likely that ADTR would intentionally (or not) release an inferior music product. (*4-5).

The balance of harms element also favored ADTR.  The Court applied a “sliding scale” analysis: the more likely a movant is to win, the less the balance of harms must weigh in the movant’s favor (and vice versa). (*2).

 Here, the Record Company had a lost profits breach of contract remedy if the band breached the recording contract.  In contrast, if ADTR was prevented from releasing its album with no end in sight to the underlying litigation, the band’s fan support could likely erode in an ultra-competitive industry (the music business) resulting in definite financial harm to the band.  (*5)

Take-aways:

Victory Records illustrates that injunctive relief is difficult to get where the moving party has a clear legal remedy.

 The Court found that past album sales provided a basis for lost profits and a sufficient legal remedy if the band breached the recording contract.

 

The Illinois Fraudulent Transfer Act – An Illinois Case Note

Heartland Bank v. Goers, 2013 IL App (3d) 12084-U illustrates the procedural and substantive hurdles a creditor’s counsel must clear to enforce a judgment against a guarantor who transfers his personal assets into a trust.

The plaintiff bank in sued the defendant for breach of a commercial guarantee after defendant’s company defaulted on a $650,000 loan.  The bank obtained a money judgment against the defendant and issued citation proceedings against him.  During post-judgment proceedings, the bank learned that before the money judgment entered against the defendant, he transferred all  his assets, including a house, cars and bank accounts into a family trust (the Trust).

The trial court ordered the defendant to relinquish one-half of his bank and stock accounts, two cars, and 50% of the sale proceeds of his residence. Defendant appealed.

Result and Reasons:

The Court first held that the trial court wrongly ordered the sale and turnover of 50% of the house sale proceeds under the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq. (the UFTA).

The UFTA deems a transfer fraudulent against a creditor where (1) for claims arising before or after the transfer, the debtor transfers property with the actual intent to impede the creditor; or (2) for claims arising before the transfer, the debtor was insolvent or became insolvent as a result of the transfer.  740 ILCS 160/5, 6; ¶ 16.

A “transfer” means the disposal of an “asset” – defined by the UFTA as property of the debtor that is not held in tenancy by entirety. ¶ 16

It’s difficult to prove a debtor’s subjective intent to impede a creditor (a UFTA Section 5 claim) so most UFTA claims are brought under UFTA Section 6: that the debtor’s transfer caused its insolvency.

The court found the defendant and his wife owned the home in tenancy by entirety at the time they transferred the home to the trust.  Because of this, the UFTA didn’t apply to the transfer.

An interest in tenant-by-the-entirety property cannot be fraudulently transferred against a creditor of only one of the tenants. (¶ 18).

Reversing the turnover and sale of the house, the Court cited Illinois’ post-judgment statute which dictates that real property held in tenancy by the entirety is not liable to be sold upon judgment entered against only one of the tenants.  (¶ 18,) 735 ILCS 5/12-112.

The Court did uphold the trial court’s turnover order involving the defendant’s investment account funds.

Under UFTA Section 6 – which governs pre-transfer claims – a creditor must show by a preponderance of the evidence (it’s “more likely than not”) that:

  • its claim arose before the transfer,
  • the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transferred property; and
  • the debtor was insolvent at the time of the transfer or was rendered insolvent as a result of the transfer.

Here, the corporate borrower’s default in July 2009 immediately triggered defendant’s obligations under the guarantee.  And since the corporation’s default predated defendant’s transferring his bank account to the trust by two months, plaintiff’s claim against defendant arose before he transferred the investment account to the Trust. ( ¶¶ 31-33)

The court also found that at the time defendant transferred the account, he was insolvent within the meaning of the UFTA.  The defendant’s financial statements revealed that the guaranteed loan amount far exceeded defendant’s total assets.  As a result, plaintiff established all required elements of a UFTA Section 6 constructive fraud claim. ( ¶ 35)

Take-aways:

1/ A judgment creditor can’t force the sale of debtor’s real estate that’s held in tenancy by entirety property;

2/ A UFTA claim applies to any right to payment; regardless of whether or not the claim is liquidated (reduced to a fixed numerical amount);

3/ The Court’s UFTA  insolvency calculus takes into account a debtor’s contingent liabilities; not just its current ones.