Tag: real estate litigation

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.

 

 

Property Subject to Turnover Order Where Buyer Is ‘Continuation’ of Twice-Removed Seller – Corporate Successor Liability in Illinois

Advocate Financial Group, LLC v. 5434 North Winthrop, 2015 IL App (2d) 150144 focuses on the “mere continuation” and fraud exceptions to the general rule of no successor liability – a successor corporation isn’t responsible for debts of predecessor – in a creditor’s efforts to collect a judgment from a business entity that is twice removed from the original judgment debtor.

The plaintiff obtained a breach of contract judgment against the developer defendant (Company 1) who transferred the building twice after the judgment date. The second building transfer was to a third-party (Company 3) who ostensibly had no relation to Company 1. The sale from Company 1 went through another entity – Company 2 – that was unrelated to Company 1.

Plaintiff alleged that Company 1 and Company 3 combined to thwart plaintiff’s collection efforts and sought the turnover of the building so plaintiff could sell it and use the proceeds to pay down the judgment. The trial court granted the turnover motion on the basis that Company 3 was the “continuation” of Company 1 in light of the common personnel between the companies.  The appeals court reversed though.  It found that further evidence was needed on the continuation exception but hinted that the fraud exception might apply instead to wipe out the Company 1-to Company 2- to Company 3 property transfer.

On remand, the trial court found that the fraud exception (successor can be liable for predecessor debts where they fraudulently collude to avoid predecessor’s debts) indeed applied and found the transfer of the building to Company 3 was a sham transfer and again ordered Company 3 to turn the building over to the plaintiff. Company 3 appealed.

The appeals court affirmed the trial court’s judgment and in doing so, provided a useful summary of the principles that govern when one business entity can be held responsible for another entity’s debts.

In Illinois, a corporation that purchases the assets of another corporation is generally not liable for the debts or liabilities of the transferor corporation. The rule’s purpose is to protect good faith purchasers from unassumed liability and seeks to foster the fluidity of corporate assets.

The “fraudulent purpose” exception to the rule of no successor liability applies where a transaction is consummated for the fraudulent purpose of escaping liability for the seller’s obligations.

The “mere continuation” exception to the nonsuccessor liability rule requires a showing that the successor entity “maintains the same or similar management and ownership, but merely wears different clothes.”  The test is not whether the seller’s business operation continues in the purchaser, but whether the seller’s corporate entity continues in the purchaser.

The key continuation question is always identity of ownership: does the “before” company and “after” company have the same officers, directors, and stockholders?

In Advocate Financial, the factual oddity here concerned Company 2 – the intermediary.  It was unclear whether Company 2 abetted Company 1 in its efforts to shake the plaintiff creditor.  The court affirmed the trial court’s factual finding that Company 2 was a straw purchaser from Company 1.

The court focused on the abbreviated time span between the two transfers – Company 2 sold to Company 3 within days of buying the building from Company 1 – in finding that Company 2 was a straw purchaser. The court also pointed to evidence at trial that Company 1 was negotiating the ultimate transfer to Company 3 before the sale to Company 2 was even complete.

Taken together, the court agreed with the trial court that the two transfers (Company 1 to Company 2; Company 2 to Company 3) constituted an integrated, “pre-arranged” attempt to wipe out Company 1’s judgment debt to plaintiff.

Afterwords:  This case illustrates that a court will scrutinize property transfers that utilize middle-men that only hold the property for a short period of times (read: for only a few days).

Where successive property transfers occur within a compressed time window and the ultimate corporate buyer has substantial overlap (in terms of management personnel) with the first corporate seller, a court can void the transaction and deem it as part of a fraudulent effort to evade one of the first seller’s creditors.

Homeowners’ Operation of Home-Based Daycare Business Doesn’t Violate Restrictive Covenant Requiring Residence Use – IL Third Dist.

The plaintiff homeowner’s association in Neufairfield Homeonwers Ass’n v. Wagner, 2015 IL App (3d) 140775, filed suit against two sets of homeowners claiming they violated restrictive covenants in the development’s declaration by operating daycare businesses from their homes.

The association based their suit on a declaration covenant that required all lots to be used for “Single Family Dwellings.”

The declaration allowed an exception for home-based businesses but only if they were operated in conformance with City ordinances and if there were no vehicles with business markings parked overnight in the development.  A further qualification to the home-based business rule prohibited activities that encouraged customers or members of the public to “frequent” the development.

The association sued when several homeowners complained that the daycare businesses resulted in increased vehicular traffic in the development and was a nuisance to the residents.

The association supported their case with an affidavit from the property manager and a homeowner – both of whom testified that the two daycares resulted in multiple non-residents entering and exiting the subdivision on a daily basis and that several residents had similar complaints.

Affirming summary judgment for the homeowner defendants, the appeals court provides a primer on the enforceability of restrictive covenants and the governing contract interpretation principles affecting them. It wrote:

-Restrictive covenants affecting land rights will be enforced according to their (the covenants) plain and unambiguous language;

–  In interpreting a restrictive covenant, the court’s objective is to give effect to the parties’ actual intent when the covenant was made;

– A condominium declaration is strong evidence of a developer’s intent and it will be construed against the developer where the declaration’s text is unclear;

– Undefined words in a declaration are given their “ordinary and commonly understood meanings” and a court will freely use a dictionary as a resource to decipher a word’s ordinary and popular meaning.

(¶¶ 16-20).

Here, the key declaration word was “frequent” – that is, did the defendants’ daycare businesses result in customers or members of the public “frequenting” the subdivision?

The declaration didn’t define the verb “frequent” but the dictionary did as to do something “habitually” or “persistently.”  Webster’s Third New International Dictionary 909 (1981); (¶ 20).

The plaintiff’s supporting affidavit established that, at most, 7 or 8 cars entered and exited the subdivision on a daily basis – supposedly to patronize the daycare businesses.  The court viewed this amount of traffic wasn’t persistent or habitual enough to meet the dictionary definition of “frequent” under the declaration.

As a result, the association’s declaratory judgment suit failed and the court affirmed summary judgment for the property owners.

Afterwords:

1/ Courts will construe declarations and restrictive covenants as written and will do so under standard contract interpretation rules (e.g. unambiguous language will be construed under plain language test and without resort to outside evidence).

2/ Where a term isn’t defined, a court can look to dictionary to inform a word’s ordinary and popular meaning.

3/ A court will construe a restrictive covenant in favor of free use of residential property and where a declaration specifically allows home-based businesses, a court will scrutinize association attempts to curtail a property owner’s use of his property.