prejudgment interest – Paul Porvaznik

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 (1^st) 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.

Pre-Development Survey Work Is Lienable and Illinois Statutory Interest On Contracts (Part II of II)

Young v. CES, Inc., 2014 IL App (2d) 131090-U also provides clarity on which services are lienable and which aren’t. The lienable vs. non-lienable distinction is an important one to grasp because if a contractor tries to affix a lien for work that didn’t improve the property, his lien can be defeated. Obvious examples of lienable work include building a house or other physical structure on a piece of land. Work that plainly isn’t lienable includes vacuuming, sweeping or property maintenance.

The tricky issues and resulting litigation emerge in the middle ground between the polar opposites of work that’s obviously lienable and work that’s clearly not.

The Young court held that the engineering firm lien claimant’s (the “Firm”) preparatory survey and construction drawing services were lienable – even though the properties remained undeveloped.

Reasons:

Section 1(a) of the Mechanics’ Lien Act (the “Act”) provides that anyone who contracts with a landowner (or with someone whom the owner authorized to contract) for property improvements can lien the property. 770 ILCS 60/1(a).

– To “improve” under the Act means to perform services as an architect, structural engineer, professional engineer, land surveyor or property manager for a piece of property. But this list isn’t exclusive: “[a]ny person who does improvement work on the land under a contract with the owner can assert a mechanic’s lien.”

– The main focus in assessing the validity of a mechanic’s lien is whether the work actually enhanced the value of the land or benefitted the landowner.

– the Act’s purpose is to require a person with an interest in real property to pay for improvements or benefits which have been induced or encouraged by its own conduct

– services that merely maintain rather than improve property are nonlienable;

– where a lien claimant can’t separate lienable from nonlienable work, the entire lien claim must fail

(¶¶ 131-132)

Pre-Development Work Is Lienable

Under these guidelines, the court found the Firm’s services were lienable improvements to the two properties. The evidence at trial showed that the Firm prepared preliminary development plans and installed an underground sewer main beneath the sites.

Moreover, the developer testified that the Firm’s pre-development engineering work improved the properties’ values because the municipality approved the project subject to final engineering. There was also testimony that thanks to the Firm’s work, the property will change from agricultural to residential use; making it more valuable.

Another factor in finding the Firm’s services were lienable was that its preliminary engineering work would not have to be redone in the future and that the survey and engineering services altered the sites so they could be developed in the future. The court wrote: “[i]t remains that[Plaintiff’s] work moved the projects in the direction of becoming… developable.” This clearly conferred a monetary benefit on the landowner. (¶¶ 137-138) .

Pre-judgment Interest

The court also held that the engineering firm could recover prejudgment interest – even though there was no written contract between it and the plaintiff property owner.

In Illinois, prejudgment interest is allowed where it’s authorized by statute, agreement of the parties or warranted by equitable considerations. Illinois law allows creditors to recover interest at the rate of five (5) percent on moneys after they become due on “instruments of writing.” 815 ILCS 205/2. (¶ 144)

Here, even though there was no contract between the Firm and the landowner, the Firm did have a written contract with the developer – who the court ruled was the plaintiff/owner’s agent. This satisfied the statute’s “instrument of writing” requirement so that the Firm could recover prejudgment interest.

Afterwords: Pre-development work that makes it easier to develop property in the future can be lienable; especially where there is witness testimony that the preparatory work improved the land and increased its value. Also, prejudgment interest can be recovered absent a written contract between a plaintiff and defendant as long as plaintiff has a written contract with an agent of the defendant or where there is some writing that tangentially connects plaintiff to the dispute.

Account Stated and Course of Dealing: Illinois Law

STOPS Enterprises, LLC v. United Medical Equipment Co., 2014 WL 2699723 (N.D. IL 2014), examines how the parties’ course of dealing defines an oral contract and analyzes the account stated remedy in a case involving unpaid invoices for medical transportation services.

Under a series of oral agreements, plaintiff would pick up and give rides to the defendant’s clients in exchange for the defendant paying the plaintiff its transportation and wait time rates.

Over a three-year period, defendant fell behind in its payments and plaintiff sued to recover about $185,000 in unpaid invoices. The court granted the plaintiff summary judgment on its breach of contract and account stated counts.

Result: Affirmed.

Reasoning:

There was no factual dispute that the plaintiff established defendant’s breach of an oral contract. In the oral contract setting, the parties course of dealing or course of performance gives content to the specifics of an agreement.

The defendant argued that the plaintiff’s damage claim for “wait time charges” (about $30,000 of the claimed damages) should be stricken since there was no meeting of the minds on this point. The court quickly rejected this argument; noting that the parties course of performance – shown by three years of plaintiff charging and defendant paying wait time charges – clearly established that these charges were a material and agreed term of the parties’ oral contract. (*5-6).

The Court also held that even if there was no express contract, the plaintiff established an account stated. In Illinois, an account stated is a determination of the amount of an existing debt combined with a tacit promise to pay that debt.

When a plaintiff issues a statement of account to a defendant and the defendant retains the statement without objection within a reasonable amount of time, the law deems this as the defendant’s acknowledgement of the validity of the statement’s accuracy.

The court will infer a meeting of the minds (as to the amounts owed) from the defendant’s failure to object to a statement of account within a reasonable time. (*7).

Here, the plaintiff sent multiple e-mails requesting payment from defendant and the defendant sent numerous return e-mails acknowledging and promising to pay the debt.

The defendant also never objected to the plaintiff’s invoices and made partial payments to them over a several-month period. The court found that by its actions, the defendant conceded the validity of plaintiff’s invoices.

The court further observed that for almost three years before its default, the defendant regularly paid plaintiff’s invoices without incident. (*8).

The Court granted plaintiff’s claim for nearly $14,000 in prejudgment interest. Section 2 of the Illinois Interest Act (815 ILCS 205/2) allows a creditor to recover prejudgment interest at the rate of 5% on “instruments of writing.” The party claiming interest must show that the money amount owed is an easily calculable (“liquidated”) amount or easy computable.

Illinois case law specifically includes unpaid invoices within the instruments of writing definition. Because of this, the Court allowed the plaintiff to recover interest on the unpaid invoices measured from 30 days after the plaintiff stopped providing ride services to the defendant. (*10).

Take-aways:

(1) the parties’ course of performance provides evidence of oral contract terms; (2) a failure to dispute invoices can lead to an account stated; (3) FRE 408 will not bar statements or admissions if they were made before an actual dispute formed; (4) pre-judgment interest will apply to an oral contract.

As long as there are unpaid invoices or other documents to show a readily computable sum, a plaintiff can tack on annual interest of 5% to the judgment amount and to his damage claim.

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