Tag: judicial estoppel

Contractor’s Legal Malpractice Suit Can Go Forward In Case of (Alleged) Misfiled Mechanics’ Lien: IL 1st Dist.

Construction Systems, Inc. v. FagelHaber LLC, 2015 IL App (1st) 141700, dramatically illustrates the perilous consequences that can flow from a construction contract’s failure to identify the contracting parties and shows the importance of clarity when drafting releases intended to protect parties from future liability.

The plaintiff contractor sued its former law firm (the Firm) for failing to properly perfect a mechanics lien against a mortgage lender on commercial property.  The plaintiff alleged that because of the Firm’s lien perfection failure, the plaintiff was forced to settled its claim for about $1.3M less than the lien’s worth (about $3M). 

In the underlying lien case, the plaintiff and defendant Firm got into a fee dispute and the Firm withdrew.  The Firm turned over its file to the plaintiff after the plaintiff made a partial payment of the outstanding fees (owed to defendant Firm) and signed a release (the “Release”). The Release, which referenced “known and unknown” claims and contained “without limitation” verbiage, was signed by the plaintiff in 2004.  Plaintiff filed the current malpractice suit in 2009.

The trial court entered summary judgment for the Firm on the basis that the Release immunized the Firm from future claims.  Plaintiff appealed.

Held: Reversed

Rules/Reasons:

Reversing summary judgment for the Firm, the First District first applied the relevant rules governing written releases in Illinois.

– a release is a contract and is governed by contract law;

– a release will be enforced as written where it’s clearly worded

– the scope and effect of a release is controlled by the intention of the parties;

– the intention of the parties is divined by reference to the words of the release and a release won’t be construed to defeat a claim that was not contemplated by the parties when they signed it;

– A “general” release will not apply to specific claims where a party is unaware of other (specific) claims;

– Where one party to a release owes the other a fiduciary duty (e.g. lawyer-client), the party owing the fiduciary duty has the burden of showing that it disclosed all relevant information to the other party.

(¶¶ 25-28).

Here, the court gave the Release a cramped construction.  It held that it didn’t apply to the malpractice suit since that case wasn’t filed until 5 years after the Release was signed and there was no evidence that the plaintiff knew that the Firm possibly flubbed the lien filing when it (the plaintiff) signed the Release.  This lack of evidence on the parties’ intent raised a disputed fact question that required denial of summary judgment.

Next, the court turned to the Firm’s judicial estoppel argument – that the plaintiff couldn’t sue for malpractice since it obtained a benefit in the underlying lawsuit (a settlement payment of $1.8M from the competing lender) by claiming it was an original contractor and not a subcontractor.  Judicial estoppel applies where (1) a party takes two positions under oath, (2) in separate legal proceedings, (3) the party successfully maintained the first position and obtained a benefit from it; and (4) the two positions are inconsistent.  (¶ 37).

The issue was paramount to the underlying lien case because if the plaintiff was a subcontractor, it had to comply with the 90-day notice requirement of Section 24 of the Lien Act.  But if it was a general or original contractor, plaintiff was excused from the 90-day notice requirement.  Based on this factual uncertainty, the court found the plaintiff had a right to pursue alternative arguments to salvage something of its approximately $3M lien claim.

The court also agreed with the plaintiff that it could recover prejudgment interest on the legal malpractice claim.  Since that claim flowed from the underlying allegation that the Firm failed to perfect plaintiff’s lien, and since Section 21 of the Illinois Mechanics Lien Act allows for prejudgment interest (770 ILCS 60/21), the plaintiff could add the interest it would have recovered to the damage claim versus the Firm. (¶ 48).

Afterwords:

1/ A broad release can still be narrowly interpreted to encompass only those claims that were likely in the release parties’ contemplation.  If a claim hadn’t come to fruition at the time a release is signed, the releasing party can argue that an expansive release doesn’t cover that inchoate claim;

2/ Judicial estoppel requires more than alternative pleadings or arguments.  Instead, the litigant must take two wholly contradictory statements and obtain a benefit from doing so.  What’s a “benefit” is open to interpretation.  Here, the plaintiff received $1.8M on its lien claim in the earlier litigation.  Still, this wasn’t a benefit in relation to the value of its lien – which exceeded $3M;

3/ If the underlying claim – be it common law or statutory – provides for pre-judgment interest, then the later malpractice suit stemming from that underlying claim can include pre-judgment interest in the damages calculation.

 

 

Contractors’ Honest Mistake in Lien Completion Date And Amounts Doesn’t Doom Mechanic’s Lien Case (IL Law)

imageThe First District recently validated the mechanics liens of two “ma and pa” construction companies against a competing lienholder’s argument that the  liens contained a flawed completion date and an exaggerated lien amount.

North Shore Community Bank v. Sheffield Wellington LLC, 2014 IL App (1st) 123784 is a priority dispute between mortgage lenders and mechanics lien claimants on commercial property.  In examining the parties’ competing claims, the Court addresses what consequences flow from a contractor’s failure to accurately state and prove its completion date under the Illinois Mechanics’ Lien Act, 770 ILCS 60/1 et seq. (the “Lien Act”) and whether that failure defeats its lien claim.

The lender sued to foreclose its mortgage and two contractors counterclaimed to foreclose their mechanics liens on the site.  One lien claimant – who built an office at the site – misstated its completion date by about a week while a roofing contractor couldn’t prove (in its deposition testimony and documents) that it actually performed on its stated completion date.  In addition, the office builder’s principal admitted in his deposition that the lien amount could be off by as much as 10%.  Based on the completion date and lien amount discrepancies, the lender moved for summary judgment against both contractors.  The trial court granted the lender’s motion and found that the mortgage lien trumped the mechanics’ liens.

Held: Summary judgment reversed.

Rules/Reasons:

Reversing summary judgment for the lender, the Court expanded on the Lien Act’s purpose and discussed whether misstated recorded lien information was a binding judicial admission:

The Mechanics’ Lien Act’s Purpose

– The Lien Act’s purpose is to allow someone who has improved property by furnishing labor or materials to lien that property;

– Section 7 of the Lien Act requires a contractor to file its lien  within 4 months after completion in order to enforce his lien against third-party creditors or other lienholders;

– While the Act is silent on completion date, the courts have interpreted Section 7 to require a lien claimant to include a completion date in order to be enforceable;

– Section 24 of the Act governs subcontractors and requires them to serve notice of their lien to the lender (“lending agency”) within 90 days after the completion date;

– Completion date under Section 7 and 24 doesn’t mean completion of the project in total; it just means completion of the work sought to be liened;

– The purpose of Section 7 (which governs contractors) and 24 (which governs subs) is to provide notice to third parties of the existence of a lien claim.

Overstated Liens – What Is ‘Intent to Defraud’?

– An overstated lien can be deemed fraudulent only where an “intent to defraud” is shown (770 ILCS 60/7a);

– A lien will be defeated where it contains a (1) knowing and (2) substantial overcharge;

– An intent to defraud can be proven by executed documents that overstate the amount in combination with some other evidence (i.e. a “Plus Factor”) from which fraudulent intent can be inferred;

– Section 7 of the Act is designed to protect the honest lien claimant who makes a mistake; not a dishonest claimant who knowingly makes a false statement;

Judicial Admissions – What Are They?

– A judicial admission is a “deliberate, clear, unequivocal statement” by a party about a concrete fact within that party’s knowledge;

– The effect of a judicial admission is that is withdraws a fact from dispute and makes unnecessary any need to prove the fact at trial;

– A statement that is the product of mistake or inadvertence is not a binding judicial admission;

– Judicial admissions are designed to deter perjury; they aren’t designed to punish honest mistakes;

– A litigant can’t contradict a prior judicial admission in summary judgment proceedings or at trial;

(¶¶ 81-90, 101-103, 126).

Applying these rules, the Court found that plaintiffs’ incorrect completion dates didn’t impact the mortgage lender’s notice rights.  Both liens were facially valid since they were timely filed; even with a technically wrong completion date.  The office subcontractor served its lien notice on the lender within 90 days of the completion of its work and the roofing general contractor filed its lien within the four-month period required Section 7.

The Court also noted that any incorrect completion dates were the results of honest mistakes – they weren’t binding judicial admissions.  This was because the lien claimants were “ma and pa” companies with limited resources.  One claimant was a single-person entity while the other had two employees that operated from a home office.  The Court also credited testimony by one of the contractors that it had never filed a lien before and wasn’t sure what information was key to the completion date or lien amount questions.  (¶¶129-130).

Finally, the Court rejected the lender’s constructive fraud argument – premised on the subcontractor’s officer admitting in a deposition that the lien amount could be “about 10% off.”  There was no evidence that the subcontractor intentionally made a substantial overcharge and that any flawed numbering was the result of an honest mistake.  An inflated lien amount – without more – is not enough for a constructive fraud finding.

Now What?: This case serves as a strong example of a court refusing to elevate form over substance.  While a completion date is required, a minor error in that date won’t defeat the lien if its otherwise facially valid (i.e. timely filed).  Also, constructive fraud in the lien context is hard to prove.  If a lien claimant can show that a lien error is an honest mistake and not purposely exaggerated, that lien claimant may still be able to prosecute his lien foreclosure suit.

Failure to Disclose Claim in Bankruptcy Torpedoes Later Injury Suit

What happens if  (a) you get injured (and you aren’t at fault and have a claim against the person who injured you) after you file for bankruptcy but (b) before you get a discharge and (c) you don’t inform the bankruptcy court of this claim? 

That’s the question examined in Schoup v. Gore, 2014 IL App (4th) 130911 (4th Dist. 2014), a case that will doubtlessly serve as a cautionary tale and make bankruptcy petitioners think twice before not informing the bankruptcy court of a potential civil claim.

In Schoup, the debtor filed bankruptcy in 2010 and obtained a discharge in 2012.  Several months into his bankruptcy, he was injured when he tripped on private property.  This gave the debtor a future premises liability claim against the property owners.  The debtor didn’t tell the bankruptcy court or trustee of the premises suit until after his bankruptcy case was discharged.  

Fresh off his discharge, the debtor filed his premises suit against the property owners.  The owners moved for summary judgment on the basis of judicial estoppel.  They argued that the plaintiff’s failure to disclose the premises suit as an asset in his bankruptcy case barred the premises liability action.  The trial court agreed and entered judgment for the property owners.  Plaintiff appealed.

Ruling: Affirmed.

Q: Why?

A: The judicial estoppel doctrine barred the plaintiff’s premises liability suit.  Judicial estoppel prevents a litigant from taking a position in one case and then, in a later case, taking the opposite position (i.e., you can’t claim that you’re an independent contractor in one case and then in a second case, claim that you’re an employee.)  Judicial estoppel’s purpose is to protect the integrity of the court system and to prevent a party from making a mockery of court proceedings by conveniently taking whatever position happens to serve that party at a given moment.  (¶ 9).  Judicial estoppel applies where a party (1) takes two contrary positions in legal proceedings; (2) successfully maintains that first position and benefits from it.  In the post-bankruptcy setting, a debtor who fails to disclose an inchoate lawsuit can’t later realize a benefit from his concealment. (¶ 14).

The plaintiff here took two positions: he impliedly represented to the bankruptcy court that he had no pending lawsuits and then filed a personal injury suit in state court after discharge.  The two positions were taken in judicial proceedings (Federal bankruptcy court and Illinois state court) and under oath (the plaintiff signed sworn disclosures in the bankruptcy court and filed a sworn complaint in state court).  The plaintiff also obtained a benefit from concealing the premises liability case as he received a discharge without any creditor knowing about the state court claim.  (¶¶ 17-18).

Conclusion: From a defense posture, the case is a great reminder to always check on-line bankruptcy records to see if a plaintiff suing your client has any prior bankruptcies.  More than once I’ve found that a plaintiff recently received a discharge before filing suit and never disclosed the lawsuit as an asset in the bankruptcy case.  In those situations, the plaintiff, not wanting to deal with a judicial estoppel motion (like the one filed by the defendants in this case), is usually motivated to settle for a reduced amount and in one case, even non-suited the case. 

From the lens of a debtor, the lesson is to fully disclose all assets – even lawsuits that haven’t materialized on the bankruptcy filing date.  Otherwise, they run the risk of having a creditor challenge the discharge or even having a future lawsuit dismissed.