Car Seller’s Impossibility and Commercial Frustration Defenses Fail In Missing Mercedes Case – IL ND

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Sunshine Imp & Exp Corp. v. Luxury Car Concierge, Inc., 2015 WL 2193808 (N.D.Ill. 2015) serves as a recent example of how difficult it is for a breach of contract defendant to successfully argue the impossibility or commercial frustration defense.

There, a case involving multiple layers of interconnected luxury car sellers, the plaintiff car seller sued another seller for breach of contract when the defendant’s failed to deliver a $100k Mercedes to the plaintiff.

The defendant blamed one of its vendors’ for failing to produce the car.  That vendor, in turn, cited the embezzlement of one of its sellers as the cause of the breach.

The defendant argued that since it couldn’t control the various parties involved in acquiring the car, it was immunized from liability under the impossibility and commercial frustration defenses.

The court rejected the defenses and entered judgment for the plaintiff for the full amount paid for the no-show Mercedes.

The defendant first made a procedural challenge to plaintiff’s suit.  It argued that since the plaintiff never formally responded to defendant’s affirmative defenses, the plaintiff waived its challenge to them.  The court quickly disposed of this argument.  While under Illinois law, the failure to object to an affirmative defense can result in the admission of the defense and a waiver of a right to contest it, this isn’t the case in Federal cases.

This is because Federal procedural rules govern Federal cases and under FRCP 8(b), if a responsive pleading isn’t required, an allegation in a defense is considered denied or avoided.  Moreover, FRCP 7(a) specifies the types of pleadings that are allowed and a reply to an affirmative defense isn’t one of them.  As a result, affirmative defenses raised in an answer are automatically deemed denied in the Federal scheme since no reply to affirmative defenses are permitted (unless ordered by the court).

The defendant’s impossibility of performance and commercial frustration defenses also failed substantively.

The impossibility doctrine applies where there is  an unanticipated circumstance that makes performance “vitally different” from what was or should have been within the reasonable contemplation of the parties.  Impossibility applies in very limited situations – parties to a contract normally must adhere to the agreement terms and subsequent contingencies that aren’t spelled out in a contract won’t invalidate the contract.

What’s more, the fact that a promisor can’t control the acts of a third party won’t trigger the impossibility defense unless the contract explicitly says so.  What’s more, a contracting promisor isn’t absolved of his obligations due to a third party’s failure to perform.

The court found the defendant’s impossibility defense lacking since it was (or should have been) foreseeable that the defendant’s supplier would have failed to deliver the car for any number of reasons.

(**3-4).

The defendant’s related defense of “commercial frustration” also fell short.  This defense applies in two circumstances: (1) where a frustrating event isn’t foreseeable and (2) that event totally or almost totally destroys the value of the party’s performance.  An example of this is where the destruction of a building terminates the lease.

Like impossibility, commercial frustration applies sparingly; it is only where a party’s performance is rendered “meaningless” due to the unforeseen circumstance that the contract terminates.  The defense becomes operative where a contract assumes the continued existence of a certain state of things and that state of things ceases to exist.

A successful commercial frustration defense voids the contract and requires any monies paid to be returned to the paying party.

The court discarded the defendant’s commercial frustration defense on the basis that the defendant could have foreseen that its supplier would have failed to tender the Mercedes.  Since the defendant failed to negotiate this possibility into the contract, the defense failed.  (**5-6).

Take-aways:

The procedural lesson is that a formal response to an affirmative defense isn’t required in Federal court unless required by the court.

The case’s chief legal point is that in contracts where a party’s performance is dependent on that of a third party/parties, the party should spell this out in the contract.  Failing that, the contract will likely be enforced as written even though the breach is caused by someone’s else’s failure to perform.

Constructive Fraud in IL Mechanics’ Lien Suits: A Case Study

ACHere’s one from the vault.  While dated, the case is still relevant for its cogent discussion of important and recurring mechanics’ lien litigation issues.  In Springfield Heating and Air Conditioning, Inc. v. 3947-55 King Drive at Oakwood, LLC, 387 Ill App 3d 906 (1st Dist. 2009), the First District examined the concept of constructive fraud and discussed when a subcontractor can bring alternative unjust enrichment and quantum meruit claims in a lien suit.

The plaintiff was a subcontractor who installed HVAC materials on a construction project consisting of two adjoining properties  for a total contract sum of about $400,000.  When the general contractor fired it, the plaintiff liened both parcels each for $300,000 – the total amount plaintiff was then due for its HVAC work.  The result was a “blanket lien” on the properties for a total of about $600K – double the proper amount.

The plaintiff sued to foreclose its liens and filed companion (and alternative) claims for quantum meruit and unjust enrichment against the general contractor and owner defendants.  The trial court granted the defendants’ motion to dismiss the plaintiff’s claims.  The court held that the lien claim was constructively fraudulent since it was inflated by almost two times the actual lien amount and because the lien wasn’t apportioned among the two property parcels.  The Court dismissed the plaintiff’s quantum meruit and unjust enrichment claims because it held that a subcontractor’s only remedy against an owner is a mechanics lien foreclosure action.

Held: Affirmed in part; reversed in part

 Constructive Fraud

The First District found there was no evidence of constructive fraud by the subcontractor; noting that Section 7 of the Lien Act aims to protect honest lien claimants who make a mistake rather than claimants who intentionally make a false statement or who knowingly inflates their lien.  That’s why someone must show an intent to defraud in order to nullify a lien.

While acknowledging that the plaintiff subcontractor’s lien totaled about $600K – nearly double of the amount it was actually owed – the Court looked beyond the liens’ numerical overcharge and found no additional evidence of fraudulent intent. 

This holding amplifies the First District’s Cordeck Sales, Inc. v. Construction Systems, Inc. (382 Ill.App.3d 334(1st. Dist. 2008)) ruling – a case viewed with near-Biblical reverence in Illinois mechanics lien circles – that a mechanics lien won’t be invalidated for constructive fraud simply because its inflated.  There must be an overstatement “in combination” with other record evidence that allows the court to infer fraudulent intent.  Here, there was no additional fraud evidence and the Court reinstated the subcontractor’s lien claim.

Quantum Meruit/Unjust Enrichment

The Court sustained the trial court’s dismissal of the plaintiff’s equitable counts of quantum meruit and unjust enrichment.  The general rule is that a subcontractor like plaintiff can’t recover for unjust enrichment where the entire work to be performed by the subcontractor is under a contract with the general contractor.  See Premier Electrical Construction Co. v. La Salle National Bank, 132 Ill. App. 3d 485, 496 (1st Dist. 1985). 

In such a case (no privity between owner and subcontractor), the general contractor has the power to employ whom he chooses and the owner is entitled to presume that any subcontracting work is being done for the contractor; not the owner.  Since there is normally no direct contract between a subcontractor and the owner, a subcontractor can’t claim that its work unjustly enriched the owner.

So, unless the subcontractor proves that it dealt directly with a property owner, its exclusive remedy against an owner is a statutory, mechanics lien suit.  Swansea Concrete Products, Inc. v. Distler, 126 Ill. App. 3d 927, 932 (5th Dist. 1984).  If the subcontractor misses the time deadlines to record its lien (four months, usually) or fails to timely file suit to foreclose the lien (two years post-completion of job), the subcontractor can’t then try to recover against the property owner under quantum meruit or unjust enrichment. 

Here, since the plaintiff’s contract was with the general contractor and not the owner, the plaintiff’s remedy against the general contractor was for breach of contract and its remedy against the owner was a mechanics’ lien suit.  As a result, the plaintiff’s quantum meruit and unjust enrichment claims were properly dismissed.

Afterwords: Even though the case is now several years old, Springfield Heating has continued relevance in construction lien litigation because it is the First District’s most recent word on the showing a property owner must make to prove a subcontractor’s constructive fraud when attempting to defeat a lien on the owner’s property.  Clearly, a numerical overcharge isn’t enough to defeat a lien. 

The owner must show additional “plus factors” which signals  fraudulent intent by the lien claimant.  The case also further supports the black-letter proposition that a subcontractor’s sole remedy against a property owner is a mechanics’ lien suit.  This rule will always apply unless the subcontractor can prove that the owner specifically requested or induced the subcontractor’s labor and materials on the owner’s property.

 

 

Getting E-Mails Into Evidence: (Ind.) Federal Court Weighs In

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Since e-mail is the dominant form of business communication across the globe, it’s no surprise that it comprises a large chunk of the documents used as evidence at a business dispute trial.

Email’s prevalence in lawsuits makes it crucial for litigators to understand the key evidence authenticity and foundational rules that govern whether an email gets into evidence.  This is especially true where an email goes to the heart of a plaintiff’s claims (or defendant’s defenses) and the e-mail author or recipient denies the e-mail’s validity.

Finnegan v. Myers, 2015 WL 5252433 (N.D. Ind. 2015), serves as a recent example of a Federal court applying fundamental evidence rules to the e-mail communications context.

In the case, the plaintiffs, whose teenaged daughter died under suspicious circumstances, sued various Indiana child welfare agencies for lodging criminal child neglect charges against them that were eventually dropped.  The plaintiffs then filed Federal civil rights and various due process claims against the defendants.

The defendants moved for summary judgment and then sought to strike some of plaintiffs’ evidence opposing summary judgment.  A key piece of evidence relied on by the plaintiff in opposing summary judgment that the defendants sought to exclude as improper hearsay was an e-mail from a forensic pathologist to child welfare personnel that called into questions the results of a prior autopsy of the deceased.

Denying defendants’ two motions (the summary judgment motion and motion to strike), the Court provides a useful gloss on the operative evidence rules that control e-mail documents in litigation.

  • The Federal Rules of Evidence (FRE) require a proponent to produce evidence sufficient to support a finding the item is authentic – that it is what the proponent claims it to be;
  • FRE 901 recognizes several methods of authentication including witness testimony, expert or non-expert comparisons, distinctive characteristics, and public records, among others;
  • FRE 902 recognizes certain evidence as inherently trustworthy and “self-authenticating” (requiring no additional proof of authenticity).  Evidence in this camp includes public records, official publications, newspapers and periodicals, commercial paper, and certified domestic records of a regularly conducted activity;
  • Authentication only relates to the source of the documents – it does not mean that the documents’ contents are taken as true;
  • E-mails may be authenticated by circumstantial evidence such as (a) viewing the e-mail’s contents in light of the factual background of the case, (b) identifying the sender and receiver via affidavit, (c) identifying the sender by the e-mail address from which the e-mail was sent, (d) comparing the email’s substance to other evidence in the case, and (e) comparing the e-mail to other statements by the claimed author of a given email.

(** 5-6)

Applying these guideposts, the court found that the plaintiff sufficiently established that the subject email was genuine (i.e., it was what it purported to be) and that it was up to the jury to determine what probative value the email evidence had at trial.

The court also agreed with the plaintiff that the pathologist’s email wasn’t hearsay: it was not used for the truth of the email.  Instead, it was simply used to show that the State  agency was put on notice of a second autopsy and changes in the pathologist’s cause of death opinions.

Afterwords:

This case resonates with me since I’ve litigated cases in the past where a witness flatly denies sending an email even though it’s from an e-mail address associated with the witness.  In those situations. I’ve had to compile other evidence – like the recipient’s affidavit – and had to show the denied email is congruent with other evidence in the case to negate the denial.

Finnegan neatly melds FRE 901 and 902 and provides a succinct summary of what steps a litigator must take to establish the authenticity of e-mail evidence.