Tag: affirmative defense

Set-off Is Counterclaim; Not Affirmative Defense – IL Court Rules in Partition Suit

Stadnyk v. Nedoshytko, 2017 IL App (1st) 152103-U views the counterclaim-versus-affirmative defense distinction through the prism of a statutory partition suit involving co-owners of a Chicago apartment building.

The plaintiff sued to declare the parties’ respective ownership rights in the subject property.  After the court issued a partition order finding the plaintiff and defendants had respective 7/8 and 1/8 ownership interests.  After the trial court ordered a partition of the property, the defendants filed affirmative defenses titled unjust enrichment, breach of fiduciary duty and equitable accounting.  Through all the “defenses” defendants sought to recoup property maintenance and repair expenses they made through the years.

The trial court struck defendants’ affirmative defenses on the basis that they were actually counterclaims and not defenses. The court also refused to award statutory attorneys’ fees to the plaintiff.  Each side appealed.

Affirming the trial court’s striking of the defendants’ affirmative defenses, the First District initially considered the difference between an affirmative defense and a counterclaim.

Code Section 2-608 provides that counterclaims in the nature of “setoff, recoupment, cross-claim or otherwise, and whether in tort or contract, for liquidated or unliquidated damages, or for other relief, may be pleaded as a cross claim in any action, and when so pleaded shall be called a counterclaim.” 735 ILCS 5/2-608

Code Section 2-613 governs affirmative defenses and requires the pleader to allege facts supporting a given defense and gives as examples, payment, release, satisfaction, discharge, license, fraud, duress, estoppel, laches, statute of frauds, illegality, contributory negligence, want or failure of consideration. 735 ILCS 5/2-613.

Counterclaims differ from affirmative defenses in that counterclaims seek affirmative relief while affirmative defenses simply seek to defeat a plaintiff’s cause of action.  In this case, the defendants’ did not seek to defeat plaintiff’s partition suit.  Instead, the defendants sought post-partition set-offs against sale proceeds going to plaintiff for defendants’ property maintenance and repair expenses.

A setoff is a counterclaim filed by a defendant on a transaction extrinsic to the subject of plaintiff’s suit.  Since the defendants styled their affirmative defenses as sounding in setoff and accounting – two causes of action (not defenses) – the Court affirmed the trial court’s striking the defenses.

The Court also reversed the trial court’s order refusing to apportion plaintiff’s attorneys fees.  Section 17-125 of the partition statute provides that a partition plaintiff’s attorney can recover his fees apportioned among the various parties since, in theory, the attorney acts for all interested parties.  However, where a party mounts a “good and substantial defense to the complaint,” the plaintiff’s attorneys’ fees should not be spread among the litigants. 735 ILCS 5/17-125.

Here, the defendants attempted to raise defenses (setoff and public sale, as opposed to private, was required) but only after the trial court entered the partition order.  Since the defendants didn’t challenge plaintiff’s partition request but instead sought a setoff for defendants’ contributions to the property and a public sale of the property, the trial court correctly concluded the defendants failed to raise good and substantial defenses under the partition statute.  As a consequence, the trial court should have apportioned plaintiff’s attorneys’ fees.

Afterwords:

Stadnyk cements the proposition that a counterclaim differs from an affirmative defense and that setoff fits into the former category.  The case also stresses that where a defendant seeks to recover damages from a plaintiff based on a collateral transaction (other than the one underlying the plaintiff’s lawsuit), defendant should file a counterclaim for a setoff rather than attempt to raise the setoff as a defense.

Other critical holdings from the case include that a court of equity lacks power to go against clear statutory language that require a public sale and partition plaintiff attorneys’ fees should only be apportioned where a defendant doesn’t raise a substantial defense to the partition suit.

 

 

Non-shareholder Liable For Chinese Restaurant’s Lease Obligations Where No Apparent Corporate Connection – IL Case Note

fortune-cookiePink Fox v. Kwok, 2016 IL App (1st) 150868-U, examines the corporate versus personal liability dichotomy through the lens of a commercial lease dispute.  There, a nonshareholder signed a lease for a corporate tenant (a Chinese restaurant) but failed to mention the tenant’s business name next to his signature.  This had predictable bad results for him as the lease signer was hit with a money judgment of almost $200K in past-due rent and nearly $20K in attorneys’ fees and court costs.

The restaurant lease had a ten-year term and required the tenant to pay over $13K in monthly rent along with real estate taxes and maintenance costs.  The lease was signed by a non-shareholder of the corporate tenant who was friends with the tenant’s officers.

The non-shareholder and other lease guarantors appealed a bench trial judgment holding them personally responsible for the defunct tenant’s lease obligations.

Held: Affirmed

Reasons:

The first procedural question was whether the trial court erred when it refused to deem the defendants’ affirmative defenses admitted based on the plaintiff’s failure to respond to the defenses.

Code Section 2-602 requires a plaintiff to reply to an affirmative defense within 21 days.  The failure to reply to an affirmative defense is an admission of the facts pled in the defense.  But the failure to reply only admits the truth of factual matter; not legal conclusions. 

A failure to reply doesn’t admit the validity of the unanswered defense.  The court has wide discretion to allow late replies to affirmative defenses in keeping with Illinois’ stated policy of having cases decided on their merits instead of technicalities.  (¶ 55)

The appeals court affirmed the trial court’s allowing the plaintiff’s late reply.  The court noted the defendants had several months to seek a judgment for the plaintiff’s failure to reply to the defenses yet waited until the day of trial to “spring” a motion on the plaintiff.  Since the Illinois Code is to be construed liberally and not in a draconian fashion, the Court found there was no prejudice to the defendants in allowing the plaintiff’s late reply.

The court next considered whether the trial court properly entertained extrinsic evidence to interpret the commercial lease.  The body of the lease stated that the tenant was a corporation yet the signature page indicated that an individual was the tenant.  This textual clash created a lease ambiguity that merited hearing evidence of the parties’ intent at trial.

Generally, when an agent signs a contract in his own name and fails to mention the identity of his corporate principal, the agent remains liable on the contract he signs.  But where an agent signs a document and does note his corporate affiliation, he usually is not personally responsible on the contract.  Where an agent lacks authority to sign on behalf of his corporate employer, the agent will be personally liable.  (¶¶ 76-77)

Since the person signing the lease testified at trial that he did so “out of friendship,” the trial court properly found he was personally responsible for the defunct Chinese restaurant’s lease obligations.

The court also affirmed the money judgment against the lease guarantors and rejected their claim that there was no consideration to support the guarantees.

Under black letter lease guarantee rules, where a guarantee is signed at the same time as the lease, the consideration supporting the lease will also support the guarantee.  In such a case, the guarantor does not need to receive separate or additional consideration from the underlying tenant to be bound by the guarantee.

So long as the primary obligor – here the corporate tenant – receives consideration, the law deems the same consideration as flowing to the guarantor.

Afterwords:

1/ Signing a lease on behalf of a corporate entity without denoting corporate connection is risky business;

2/ If you sign something out of friendship, like the defendant here, you should make sure you are indemnified by the friend/person (individual or corporation) you’re signing for;

3/ Where a guaranty is signed at the same time as the underlying lease, no additional consideration to the guarantor is required.  The consideration flowing to the tenant is sufficient to also bind the guarantor.

 

 

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.