Statute of Limitations and Installment Contracts: What is the Date of Breach and When Does the Limitations Period Start to Run – An IL Case Note

The statute of limitations defense and the equitable doctrine of laches are firmly-entrenched legal devices aimed at fostering finality in litigation.  The limitations and laches defenses both look to the length of time a plaintiff took to file suit and strive to balance a plaintiff’s right to have his claim heard on the merits with a defendant’s competing right to timely defend a lawsuit.

The inherent tension between the goals advanced by the limitations and laches defenses and the legal principle that everyone should have his or her day in court comes into sharp relief in cases involving multi-year contracts that are to be performed over time like a contract payable in annual installments.

Akhtert v. D’avis, 2013 IL App(1st) 113556-U, serves as a recent example of how difficult it can be to apply the statute of limitations and laches defenses where an oral contract doesn’t provide a clear end date and where it calls for yearly installment payments.

The oral agreement there provided that the defendant would use plaintiff’s medical facility to treat defendant’s patients in exchange for paying plaintiff between 40-50% of defendant’s gross income.  The defendant made monthly payments for about two years (from 2002-2004) and stopped.

The plaintiff didn’t sue until nearly seven years later (in 2011) and sought several years’ worth of payments it claimed it was owed by the defendant.  The defendant moved to dismiss plaintiff’s breach of contract claim on statute of limitations grounds and sought dismissal of plaintiff’s accounting action based on laches.  The trial court dismissed plaintiff’s claims as untimely and plaintiff appealed.

Held: Reversed in part.

Q: Why?

A: The court first held that the plaintiff’s breach of contract was timely as to all payments due within five years of the complaint’s 2011 filing date.

The statute of limitations for oral contracts in Illinois is five years, measured from the date where a creditor can legally demand payment from a debtor. 735 ILCS 13-205, (¶14).  Where a money obligation is payable in installments, the limitations period begins to run against each installment on the date the installment becomes due.  Each installment carries its own limitations period.

So, if you have a 2000 oral contract calling for annual payments starting in 2001 and wait until August 31, 2015 to sue, the suit will still be timely as to payments coming due within five years of the filing date (e.g. for all payments due on or after August 31, 2010).

Here, the court found the plaintiff’s suit was timely as to payments coming due on or after March 8, 2006 – five years preceding the 2011 complaint filing date.  Any payments due before March 8, 2006 were time-barred.

Next, the court addressed the defendant’s laches argument – asserted as a defense to plaintiff’s equitable accounting claim.  Laches is a “neglect or omission to assert a right, taken in conjunction with a lapse of time of more or less duration, and other circumstances causing prejudice to an adverse party” and applies where a plaintiff is seeking equitable (as opposed to legal or monetary relief). (¶ 25).

Laches applies where (1) a plaintiff files suit, (2) the plaintiff delays in filing the suit despite having notice of the existence of his claim, (3) the defendant lacks knowledge or notice of the existence of plaintiff’s claim, and (4) injury or prejudice resulting to the defendant by the plaintiff’s delay in filing suit.  Where the period of delay in bringing suit exceeds the applicable limitations period (here – the five-year period for breach of oral contracts), that delay will automatically constitutes laches.

The burden of showing laches is squarely on the defendant.  The mere lapse of time (between plaintiff’s knowledge of facts giving rise to a claim and plaintiff’s filing suit) isn’t enough.  The defendant must also show prejudice: that it is unfair to make him defend plaintiff’s delayed suit.

Here, the defendant couldn’t establish any unfairness in having to defend against plaintiff’s claims so it’s laches claim failed as to payments due within five years of the complaint filing date.

Take-aways:

Contracts payable in installments provide a separate limitations period for each breach;

An oral installment contract claim will be timely as to any payments pre-dating complaint date by five years;

Laches requires more than passage of time/delay between when a plaintiff is first armed with facts giving him a claim and when he actually files suit.  A defendant must also show prejudice – such as inability to track down witnesses and documents – in his ability to mount a defense based on the plaintiff’s lag time in bringing a claim to state a winning laches defense.

 

 

Illinois Partnership Law, Exclusive Remedy Provisions and Federal Judgment on the Pleadings Standards (IL ND)

Allied Waste Transportation v. Bellemead Development Corp., 2014 WL 4414510 (ND.Ill. 2014), examines the reach of liability under a decades-old partnership agreement for millions of dollars in environmental clean-up costs.

The plaintiff and defendant were partners in an entity that ran a landfill in suburban Chicago. The partnership agreement gave each party 50-50 responsibility for paying litigation costs and any fines levied against the  partnership.  If either party failed to pay under this cost-sharing section, the paying party would have his partnership share increased while the non-payer’s share would correspondingly lessen.

After plaintiff paid about $125M to end several years of environmental litigation filed by State and local governments related to the landfill, it sued for damages under CERCLA (the Federal environmental statute) and for breach of the  partnership contract.  The defendants counter-sued for breach of the partnership agreement’s indemnification provision – the section that required either partner to indemnify the other for litigation costs incurred in defending a lawsuit.

Defendants moved for judgment on the pleadings on all claims on the dual grounds that the partnership agreement’s share adjustment section was the exclusive remedy for a partnership violation and that plaintiff’s suit was premature since it failed to first seek a formal accounting.

Held: Defendants’ motion for judgment on the pleadings denied.

Reasons:

The Court held that the defendants failed to meet their burden of establishing that the plaintiff could never state a valid breach of partnership or a statutory CERCLA Claim.

A party can move for judgment on the pleadings after pleadings are closed. FRCP 12(c). The same standards that govern a Rule 12(b)(6) motion govern judgment on the pleadings motions.  A Court views allegations in the light most favorable to the non-moving party and the motion will be granted where it appears beyond a doubt that the non-movant cannot prove any set of facts sufficient to support his claim for relief.  On a judgment on the pleadings motion, the Court considers only the complaint, answer and any exhibits.

Applying these standards, the Court held that the plaintiff made out both a CERCLA claim and a cause of action for breach of the partnership agreement.  

On the breach of partnership agreement count, the Court found that the agreement’s profit and loss adjustment section was not an exclusive remedy. In Illinois, limitation of remedy provisions are enforceable but they aren’t favored. Contracting parties are not required to put all potential remedies in a document in order to make those remedies available, and providing for one specific remedy won’t always preclude another remedy.  Also, a contract doesn’t have to use the word “exclusive” for a remedy to be deemed exclusive. Instead, the remedy will be found exclusive where the contract text warrants such a finding. (*4-5).

Here, the interest adjustment section that the plaintiff argued was the exclusive remedy only applied to situations where the partnership needed an infusion of extra capital and one partner didn’t timely contribute his share. There was no language, in either the adjustment section or in the partnership agreement as a whole, to justify a finding that an increase or reduction in partnership interest was the sole remedy for a breach. (*6).

The Court also rejected defendant argument that a formal accounting was a required precursor to a partnership suit by the plaintiff. In Illinois, the general rule is that one partner can’t sue another until there has been a settlement of partnership affairs via an accounting.  An exception to this rule is where a partner’s claim can be decided without a full review of the partnership accounts.  Also, see 805 ILCS 206/405 (partner can sue partnership or a co-partner with or without an accounting) (**6-7).

Here, since the amount plaintiff paid for the environmental clean-up costs was easily calculable (as was the defendants’ share of the costs), no accounting was necessary as a precondition to plaintiff’s suit.

Afterwords: If contracting parties intend for there to be an exclusive remedy for a breach – they should say as much.  This case also makes clear that a formal accounting isn’t always required first before a partner can sue another partner or the partnership entity; especially if the suing partner can easily compute his damages.  

Partnership Dissolution: Illinois Basics

Cross v. O’Heir, 2013 IL App (3d) 120760 spotlights a dispute over the division of partnership property.

The plaintiff’s husband (who died before lawsuit was filed) entered a written partnership with the defendant to develop property.

A few years later, and unbeknownst to plaintiff’s husband, the defendant signed a cross-easement agreement with some adjacent owners to provide vehicle and pedestrian access over three parcels that were allotted to the defendant after he and plaintiff’s husband began dividing up the partnership real estate.

The plaintiff, as executor of her husband’s estate, filed suit for a declaration that the cross-easement agreement benefitted her property (adjacent to the defendant’s three parcels) and defendant counter-sued to dissolve the partnership and for an accounting.

The court entered summary judgment for the defendant and on defendant’s dissolution action.  After a bench trial on damages, the court entered a money judgment of about $40K for the defendant and the plaintiff appealed.

(¶¶ 17-19).

The Court affirmed summary judgment on the defendant’s partnership dissolution counterclaim.

The dissolution of a partnership means a change in the relation of the partners caused by any party ceasing to be associated in the carrying on of the partnership’s business.

 A partnership can be dissolved by judicial order or by operation of law.  Death of a partner normally dissolves a partnership unless the partnership agreement says otherwise. 

Judicial dissolution can be granted upon a partner’s application if the court finds that the partnership business can’t be carried out in accordance with the partnership agreement.  (¶¶ 32-33); 805 ILCS 206/801(5). 

After dissolution, each partner is entitled to a settlement of partnership accounts and a partner’s right to an accounting accrues on the date of dissolution.  A dissolution action can be brought in tandem with an accounting suit.  (¶ 34), 805 ILCS 206/807(b). 

Following dissolution, each partner must contribute to the partnership, amounts equal to any surplus funds (over credits) in the partnership’s account to pay creditors.  In addition, the estate of a deceased partner is liable for the partner’s obligation to contribute to the partnership.  805 ILCS 206/807(b), (e).

The plaintiff argued that the defendant’s dissolution action was untimely since the partnership “constructively dissolved” when it stopped doing business twelve years before the lawsuit was filed.  The Court disagreed, noting that at the time defendant filed its dissolution action, the partnership still owned property.  It wasn’t until 2011 when the last of the partnership property – the two outlots – was finally transferred.  Until those two lots were disposed of, a dissolution and accounting suit was still timely.  (¶¶ 36-37).

Afterwords:

–  A partnership agreement can provide that the partnership continues after the death of a partner;

– If a partnership has ceased doing business, a partner can still bring a dissolution action so long as there is partnership property at the time the dissolution suit is filed;

– A deceased partner’s estate is liable to the partnership for the deceased partner’s contribution to the partnership after dissolution.