Tag: Chicago

Economic Loss Rule Requires Reversal of $2.7M Damage Verdict In Furniture Maker’s Lawsuit- 7th Circuit

In a case that invokes Hadley v. Baxendale** – the storied British Court of Exchequer case published just three years after Moby-Dick (“Call me ‘Wikipedia’ guy?”) and is a stalwart of all first year Contracts courses across the land – the Seventh Circuit reversed a multi-million dollar judgment for a furniture maker.

The plaintiff in JMB Manufacturing, Inc. v. Child Craft, LLC, sued the defendant furniture manufacturer for failing to pay for about $90,000 worth of wood products it ordered.  The furniture maker in turn countersued for breach of contract and negligent misrepresentation versus the wood supplier and its President alleging that the defective wood products caused the furniture maker to go out of business – resulting in millions of dollars in damages.

The trial court entered a $2.7M money judgment for the furniture maker on its counterclaims after a bench trial.

The Seventh Circuit reversed the judgment for the counter-plaintiff based on Indiana’s economic loss rule.  

Indiana follows the economic loss doctrine which posits that “there is no liability in tort for pure economic loss caused unintentionally.”  Pure economic loss means monetary loss that is not accompanied with any property damage (to other property) or personal injury.  The rule is based on the principal that contract law is better suited than tort law to handle economic loss lawsuits.  The economic loss rule prevents a commercial party from recovering losses under a tort theory where the party could have protected itself from those losses by negotiating a contractual warranty or indemnification term.

Recognized exceptions to the economic loss rule in Indiana include claims for negligent misrepresentation, where there is no privity of contract between a plaintiff and defendant and where there is a special or fiduciary relationship between a plaintiff and defendant. 

The court focused on the negligent misrepresentation exception – which is bottomed on the principle that a plaintiff should be protected where it reasonably relies on advice provided by a defendant who is in the business of supplying information. (p. 17).

The furniture maker counter-plaintiff’s negligent misrepresentation claim versus the corporate president defendant failed based on the agent of a disclosed principal rule.  Since all statements concerning the moisture content of the wood imputed to the counter-defendant’s president were made in his capacity as an agent of the corporate plaintiff/counter-defendant, the negligent misrepresentation claim failed.

The court also declined to find that there was a special relationship between the parties that took this case outside the scope of the economic loss rule.  Under Indiana law, a garden-variety contractual relationship cannot be bootstrapped into a special relationship just because one side to the agreement has more formal training than the other in the contract’s subject matter.

Lastly, the court declined to find that the corporate officer defendant was in the business of providing information.  Any information supplied to the counter-plaintiff was ancillary to the main purpose of the contract – the supply of wood products.

In the end, the court found that the counter-plaintiff negotiated for protection against defective wood products by inserting a contract term entitling it to $30/hour in labor costs for re-working deficient products.  The court found that the counter-plaintiff’s damages should have been capped at the amount representing man hours expended in reconfiguring the damaged wood times $30/hour – an amount that totaled $11,000. (pp. 9-17, 24).

Take-aways:

1/ This case provides a good statement of the economic loss rule as well as its philosophical underpinnings.  It’s clear that where two commercially sophisticated parties are involved, the court will require them to bargain for advantageous contract terms that protect them from defective goods or other contingencies;

2/ Where a corporate officer acts unintentionally (i.e. is negligent only), his actions will not bind his corporate employer under the agent of a disclosed principal rule;

3/ A basic contractual relationship between two merchants won’t qualify as a “special relationship” that will take the contract outside the limits of Indiana’s economic loss rule.

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** Hadley v. Baxendale is the seminal breach of contract case that involves consequential damages.  The case stands for the proposition that the non-breaching party’s recoverable damages must be foreseeable (ex: if X fails to deliver widgets to Y and Y loses a $1M account as a result, X normally wouldn’t be responsible for the $1M loss (unless Y made it clear to X that if X breached, Y would lose the account, e.g.) [https://en.wikipedia.org/wiki/Hadley_v_Baxendale]

Commercial Landlord Not Entitled to Double Rent Under Holdover Statute Where Tenant Had Legitimate Belief It Had Right to Possess Space – IL 1st Dist.

I’ve written on here before about how a tenant holding over after a lease expires can lead to a serious case of option paralysis for the landlord.  Questions abound in rapid-fire fashion: should the landlord accept the holdover and continue the lease on the same terms as before? Should the landlord seek double rent under the forcible statute?  Should the landlord refuse to cash any rent checks from the tenant after the lease expires?  What if the landlord desperately needs that post-expiration rent payment?  These are all issues that need to be addressed.  And fast. 

Spatz v. 2263 North Lincoln Corporation, 2013 IL App (1st) 122076, a somewhat dated but relevant case, examines the requirements for a holdover tenancy and the features of an enforceable option to purchase in the context of a commercial lease dispute.

That case’s plaintiff, a successor property owner (to the original landlord), sued the commercial tenant for eviction and past rent damages. The tenant defended the suit, and argued that it exercised an option to purchase the premises from the plaintiff’s predecessor before the lawsuit was filed and therefore was immune from eviction.

The trial court sided with the plaintiff awarding it possession and rental damages but only awarding about half of its claimed attorneys’ fees. The court also denied plaintiff’s request for double rent under Illinois’ holdover statute (735 ILCS 5/9-202).  Both sides appealed.

Affirming the possession order, the appeals court rejected the defendant’s argument that it exercised a purchase option on the property and was therefore a property vendee rather than a lessee.

In Illinois, where a lease contains a purchase option, and the option is exercised and accepted according to its terms, there is no longer a lease.  What results instead is a present contract for the sale of the property.  The parties relationship then morphs from a landlord-tenant one to a vendor-vendee one.  The lessee (now the vendee) then has no further lease obligations.

However, the lessee must exercise the option to purchase to the property in exact conformance with the option. If it fails to do so, the option is deemed unexercised and the landlord can pursue rights under the lease. (¶¶ 27-28).

Here, the court found that the lessee’s purported acceptance of the purchase option was too conditional to be considered a proper exercise of the option.

The court next held that the lessor failed to extend the lease or create a holdover tenancy by accepting partial rent payments from the tenant after the lessor served its 30-day termination notice.

Under Illinois law landlord-tenant law, it is the landlord’s intention, not the tenant’s, that determines whether a holdover tenancy is created. While a landlord’s acceptance of rent following the expiration of a lease can be viewed as an intent to treat a tenant as a holdover, a court objectively looks to landlord’s other conduct – such as efforts to regain the premises – to determine whether the landlord intended to treat a tenant as a holdover. (¶ 37)

The lease specifically allowed the landlord to accept post-default rent payments without extending the lease.  In addition, the landlord sued to evict the defendant. Taken together, this served as clear evidence of a landlord’s intent not to treat the tenant as a holdover.

The First District also affirmed the trial court’s denial of the plaintiff’s claim for double rent under Section 9-202 of the Forcible Statute.

This statute allows a landlord to recover double rent where a tenant willfully holds over. The statute is penal in nature and only applies where a tenant stays in possession in bad faith – basically where it knows it has no right to stay after the lease ends. (¶¶ 44-45).

Where a tenant stays on site “for colorably justifiable reasons” (i.e., under a reasonable claim of right), the landlord cannot recover double rent under the willfully holding over statute. (¶ 44)

Here, the tenant offered evidence at trial showing that it had a legitimate dispute as to whether it had a right to stay in possession after lease expires. Consequently, the appeals court affirmed the trial court’s finding against the landlord on the double rent issue.

Afterwords:

1/ An option to purchase must be exercised in strict conformity with the purchase option;

2/ For a lessor to recover double rent under the holdover statute, the lessor must prove the lessee’s willfull conduct: that the lessee refused to vacate the premises without a good faith basis for doing so;

3/ 30-days’ written notice is required to terminate a month-to-month tenancy.

The Statute of Frauds ‘One-Year Rule’ (IL Law Basics)

SOFThe Statute of Frauds (SOF) requires certain contracts to be in writing to be enforceable.  (See earlier post here).  740 ILCS 80/1; 810 ILCS 5/2-201 (UCC analog).

The SOF’s “one-year rule” posits that any contract that can’t possibly be performed within the span of one year from the date of making must be in writing.  The purpose of the one-year rule is to protect against stale memories and evidence.

Typical settings for the one-year rule defense include multi-year leases and “lifetime” employment contracts (i.e., plaintiff sues an employer claiming breach of a promise to employ the plaintiff for life).

In Chiappe-Kay v. Barthel, 2013 IL App (2d) 120975-U, the plaintiff sued the defendant after the defendant failed to transfer a Personal Seat License that allowed the defendant (and would now allow the plaintiff) to buy Chicago Bears season tickets for life.

The plaintiff sued for specific performance and defendant moved for summary judgment based on the one-year rule: the oral football tickets agreement was defeated because  it couldn’t be performed within the space of a year.

Siding with the defendant, the Court described the one-year rule’s purpose as barring actions “based upon nothing more than loose verbal statements.”  It held that the parties’ agreement couldn’t be performed within the space of a year since the agreement was that the plaintiff would receive season tickets for life based on defendant’s PSL. (¶ 16).

The Court also found that the one-year rule barred plaintiff’s claim because the Bears instituted a one-year ban on the transfer of PSLs when the Bears first issued the PSL to the defendant.  As a result, there was no way for the defendant to perform – by transferring the PSL – to the plaintiff within a one-year time span.  (¶¶ 19-21).

Farmers and Merchants v. Hulett, 2012 IL App (3d) 120022-U, involves an oral agreement between a former land trustee and the beneficiary for that beneficiary to rent a house (owned by the land trust) for the beneficiary’s lifetime.

When the successor trustee assumed control of the trust, it sent a notice terminating the tenancy and sued to evict the beneficiary tenant.  The tenant opposed the eviction suit and argued that he was allowed to live in the house for his lifetime.  The Court entered summary judgment for the successor trustee and found that the defendant’s claim to a lifetime tenancy was unenforceable since it wasn’t in writing.

The Court noted that the written land trust agreement was silent on the defendant’s right to occupy the house.  Because of this, the tenant had, at most, an oral lease agreement with the prior trustee.

In Illinois, an oral lease for a period exceeding a year – such as a lifetime lease – is treated as a year-to-year lease.  A year-to-year lease can be terminated on a landlord’s sixty-day written notice.  735 ILCS 5/9-205 (year-to-year lease is terminable on 60 days’ notice).

The Court found the successor timely terminated the oral lease under the Illinois forcible detainer statute.

Hulett also provides good reading on the topics of promissory estoppel (which usually is not an exception to the SOF) and equitable estoppel (which is). (¶¶ 14-15).

Promissory estoppel applies where someone takes action in reliance on a verbal promise by the defendant.  Equitable estoppel involves some element of calculated misconduct or deception by the defendant.