‘Inquiry Notice’ Element of Discovery Rule Dooms Plaintiff’s Fraud in Inducement Claim – IL First Dist.

The First District recently discussed the reach of the discovery rule in the course of dismissing a plaintiff’s fraud claims on statute of limitations grounds.

The plaintiff in Cox v. Jed Capital, LLC, 2016 IL App (1st) 153397-U, brought a slew of business tort claims when he claimed his former employer understated its value in an earlier buy-out of the plaintiff’s LLC interest.

Plaintiff’s 2007 lawsuit settled a year later and was the culmination of settlement discussions in which the defendants (the former employer’s owner and manager) produced conflicting financial statements.  The plaintiff went forward with the settlement anyway and released the defendants for a $15,000 payment.

In 2014, after reading a Wall Street Journal article that featured his former firm, plaintiff learned the company was possibly worth much more than was previously disclosed to him.  Plaintiff sued in 2015 for fraud in the inducement, breach of fiduciary duty and breach of contract.

The trial court dismissed the claims on the basis they were time-barred by the five-year limitations period and the plaintiff appealed.  He argued that the discovery rule tolled the limitations period and saved his claims since he didn’t learn the full extent of his injuries until he read the 2014 article.

Result: Dismissal of plaintiff’s claims affirmed.

Q: Why?

A: A fraud claim is subject to Illinois’ five-year statute of limitations codified at Section 13-205 of the Code of Civil Procedure.  Since the underlying financial documents were provided to the plaintiff in 2008 and plaintiff sued seven years later in 2015.  As a result, plaintiff’s claim was time-barred unless the discovery rule applies.

In Illinois, the discovery rule stops the limitations period from running until the injured party knows or reasonably should know he has been injured and that his injury was wrongfully caused.

A plaintiff who learns he has suffered from a wrongfully caused injury has a duty to investigate further concerning any cause of action he may have.  The limitations period starts running once a plaintiff is put on “inquiry notice” of his claim.  Inquiry notice means a party knows or reasonably should know both that (a) an injury has occurred and (b) it (the injury) was wrongfully caused.  (¶ 34)

Fraud in the inducement occurs where a defendant makes a false statement, with knowledge of or belief in its falsity, with the intent to induce the plaintiff to act or refrain from acting on the falsity of the statement, plaintiff reasonably relied on the false statement and plaintiff suffered damages from that reliance.

Plaintiff alleged the defendants furnished flawed financial statements to induce plaintiff’s consent to settle an earlier lawsuit for a fraction of what he would have demanded had he known his ex-employer’s true value.  The Court held that since the plaintiff received the conflicting financial reports from defendants in 2008 and waited seven years to sue, his fraud in the inducement claim was untimely and properly dismissed.


This case paints a vivid portrait of the unforgiving nature of statutes of limitation.  A plaintiff has the burden of establishing that the discovery rule preserves otherwise stale claims.  If a plaintiff is put on inquiry notice that it may have been harmed (or lied to as the plaintiff said here), it has a duty to investigate and file suit as quickly as possible.  Otherwise, a plaintiff risks having the court reject its claims as too late.

Commercial Tenant’s Promise to Refund Broker Commissions Barred by Statute of Frauds – IL First Dist.

The plaintiff property owner in Peppercorn 1248 LLC v. Artemis DCLP, LLP, 2016 IL App (1st) 143791-U, sued a corporate tenant and its real estate brokers for return of commission payments where the tenant never took possession under a ten-year lease for a Chicago daycare facility.  Shortly after the lease was signed, the tenant invoked a licensing contingency and terminated the lease.

The lease conditioned tenant’s occupancy on the tenant securing the required City zoning and parking permits.  If the tenant was unable to obtain the licenses, it could declare the lease cancelled.  When the tenant refused to take possession, the plaintiff sued to recoup the commission payment.

Affirming summary judgment for the broker defendants, the Court addressed some recurring contract formation and enforcement issues prevalent in commercial litigation along with the “interference” prong of the tortious interference with contract claim.

In Illinois, where a contracting party is given discretion to perform a certain act, he must do so in good faith: the discretion must be exercised “reasonably,” with a “proper motive” and not “arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the parties.” (73-74)

Here, there was no evidence the tenant terminated the lease in bad faith.  It could not get the necessary permits and so was incapable of operating a daycare business on the site. 

Next, the court found the plaintiff’s claim for breach of oral contract (based on the brokers’ verbal promise to refund the commission payments) unenforceable under the Statute of Frauds’ (“SOF”) suretyship rule. A suretyship exists where one party, the surety, agrees to assume an obligation of another person, the principal, to a creditor of the principal.

The SOF bars a plaintiff’s claim that seeks to hold a third party responsible for another’s debt where the third party did not promise to pay the debt in writing.

An exception to this rule is the “main purpose” defense. This applies where the “main purpose” of an oral promise is to materially benefit or advance the promisor’s business interests.  In such a case, an oral promise to pay another’s debt can be enforced.

The court declined to apply the main purpose exception here.  It noted that the brokers’ commission payments totaled less than $70K on a 10-year lease worth $1.4M. The large disparity between the commission and total lease payments through the ten-year term cut against the plaintiff’s main- purpose argument.

The plaintiff sued the corporate tenant for failing to return the commission payments to the brokers. Since the tenant and the broker defendants were separate parties, any promise by the tenant to answer for the brokers’ debt had to be in writing (by the tenant) to be enforceable.

The court also upheld summary judgment for the defendant on the plaintiff’s tortious interference count. (See here for tortious interference elements.)  A tortious interference with contract plaintiff must show, among other things, the defendant actively induced a breach of contract between plaintiff and another party.  However, the mere failure to act – without more – usually will not rise to the level of purposeful activity aimed at causing a breach.

The Court found one of the broker defendant’s alleged failure to help secure business permits for the tenant didn’t rise to the level of  intentional conduct that induced tenant’s breach of lease.  As a result, the plaintiff failed to offer evidence in support of the interference prong of its tortious interference claim sufficient to survive summary judgment.


1/ A promise to pay another’s debt – a suretyship relationship – must be in writing to be enforceable under the SOF;

2/ A contractual relationship won’t give rise to a duty to disclose in a fraudulent concealment case unless there is demonstrated disparity in bargaining power between the parties;

3/ Tortious interference with contract requires active conduct that causes a breach of contract; a mere failure to act won’t normally qualify as sufficient contractual interference to be actionable.


















Fraudulent Concealment In Illinois – Podiatry School Might Be On Hook for Omissions in School Catalog

A podiatry school alum may have a viable fraudulent concealment claim against the school for failing to warn him of evaporating job prospects in the foot doctor field.

That’s the key take-away from the Second District’s recent opinion in Abazari v. Rosalind Franklin University of Medicine and Science, 2015 IL App (2d) 140952, a case that considers what lengths an educational institution must go to in disclosing job placement rates and whether it can be held liable for failing to provide accurate data.

The plaintiff alleged he enrolled in the defendant’s podiatry program based on written representations contained in school brochures as well as oral statements made by high-ranking school officials.  Plaintiff claimed that the school failed to mention in its course catalog that there were too many students for available residency openings.  He also alleged that a school admissions officer misrepresented the school’s graduates’ loan default rates.  Plaintiff claimed both statements played a pivotal role in inducing plaintiff to enroll in the school.

Plaintiff’s fraud, negligent misrepresentation and fraudulent concealment claims were all dismissed with prejudice by the trial court.  Plaintiff appealed.

Partially reversing the dismissal of the fraudulent concealment claim, the Court stated the governing Illinois fraud rules that attach to student suits against higher education providers. These include:

To claim fraudulent concealment, a plaintiff must show (1) defendant concealed a material fact under circumstances that created a duty to speak, (2) defendant intended to induce a false belief, (3) the plaintiff could not have discovered the truth through reasonable inquiry or inspection, or was prevented from making a reasonable inquiry, (4) plaintiff was justified in relying on defendant’s silence as a representation that a fact did not exist; (5) the concealed information was such that the plaintiff would have acted differently had he been aware of it; and (6) the plaintiff’s reliance resulted in damages.

Like a fraud claim, fraudulent concealment must involve an existing or past state of affairs; projections of future events will not support a fraud claim.  In addition, a party cannot fraudulently conceal something it doesn’t know.

A statement that is partially or “technically” true (a half-truth) can be fraudulent where it omits qualifying information – like the fact that successful completion of the podiatry program was no guarantee of a post-graduate residency. 

While a person may not enter into a transaction “with eyes closed” to available information, a failure to investigate is excused where his inquiries are impeded by someone creating a false sense of security as to a statement’s validity.

A duty to speak arises where the parties are in a fiduciary relationship or where one party occupies a position of superiority or influence over the other.  (¶¶ 27-30, 33, 37)

The Illinois Administrative Code played an important part in the court’s decision.  Under the Code, postsecondary institutions liked the defendant must accurately describe degree programs, tuition, fees, refund policies and “such other material facts concerning the institution and the program or course of instruction as are likely to affect the decision of the student to enroll.”  23 Ill. Adm. Code S. 1030.60(a)(7).

The Court held that since the school voluntarily mentioned how crucial it was for graduates to secure podiatric residency positions.  A shortage of residencies could be material to a prospective student’s enrollment decision.  As a result, the court found that plaintiff could possibly state a fraudulent concealment claim based on the school’s failure to disclose the existing shortfall in available residencies.  The court held that the plaintiff should be able to amend his fraudulent concealment claim to supply additional facts.  (¶¶ 37-38).


The plaintiff’s claim is alive but it’s on life support.  The court did not decide that the plaintiff’s fraud claim had merit.  It instead found that the plaintiff could maybe make out a fraudulent concealment case if he can show the defendant college failed to disclose key jobs or residency data.

Still, this case should give pause not just to podiatric purveyors but to higher educational institutions across the board since it shows a court’s willingness to scrutinize the content of schools’ recruitment materials.  The case’s lesson is that if post-graduate job placement is a material concern (which it doubtlessly is), and if a school is able to keep student’s in the dark about future job prospects, then a student might have grounds for a fraud suit against his alma mater where it hides bleak post-graduate jobs stats from him.