Tag: statute of repose

Corporate Five-Year Winding Up or “Survival” Period Has Harsh Results for Asbestos Injury Plaintiffs – Illinois Court

An Illinois appeals court recently considered the interplay between the corporate survival statute, 805 ILCS 5/12.80 (the “Survival Act”), which governs lawsuits against dissolved corporations) and when someone can bring a direct action against another person’s liability insurer.

The personal injury plaintiffs in Adams v. Employers Insurance Company of Wasau, 2016 IL App (3d) 150418 sued their former employer’s successor for asbestos-related injuries. Plaintiffs also sued the former company’s liability insurers for a declaratory ruling that their claims were covered by the policies.

The former employer dissolved in 2003 and plaintiffs filed suit in 2011. The plaintiffs alleged the dissolved company’s insurance policies transferred to the shareholders and the corporate successor. The insurers moved to dismiss on the basis that the plaintiff’s suit was untimely under the Survival Act’s five-year winding up (“survival”) period to sue dissolved companies and because Illinois law prohibits direct actions against insurers by non-policy holders.

Affirming dismissal of the suit against the insurers, the court considered the scope of the Survival Act and whether its five-year repose period (the time limit to sue a defunct company) can ever be relaxed.

The Survival Act allows a corporation to sue or be sued up to five years from the date of dissolution. The suit must be based on a pre-dissolution debt and the five-year limit applies equally to individual corporate shareholders.  The statute tries to strike a balance between allowing lawsuits to be brought by or against a dissolved corporation and still setting a definite end date for a corporation’s liability. The five-year time limit for a corporation to sue or be sued represents the legislature’s determination that a corporation’s liability must come to and end at some point.

Exceptions to the Survival Act’s five-year repose period apply where a shareholder is a direct beneficiary of a contract and where the amount claimed is a “fixed, ascertainable sum.”

The Court held that since the plaintiffs didn’t file suit until long after the five-year repose period expired, and no shareholder direct actions were involved, the plaintiffs’ claims against the dissolved company (the plaintiffs’ former employer) were too late.

Illinois law also bans direct actions against insurance companies. The policy reason for this is to prevent a jury in a personal injury suit from learning that a defendant is insured and eliminate a jury’s temptation to award a larger verdict under the “deep pockets” theory (to paraphrase: “since defendant is protected by insurance, we may as well hit him with a hefty verdict.”)

The only time a direct action is allowed is where the question of coverage is entirely separate from the issue of the insured’s liability and damages. Where a plaintiff’s claim combines liability, damages and coverage, the direct action bar applies (the plaintiff cannot sue someone else’s insurer).

Here, the plaintiffs’ coverage claim was intertwined with the former employer’s (the dissolved entity) liability to the plaintiffs.  As a result, the plaintiffs action was an impermissible direct action against the dissolved company’s insurers.

Take-aways:

The Case starkly illustrates how unforgiving a statutory repose period is.  While the plaintiff’s injuries here were substantial, the Court made it clear it had to follow the law and that where the legislature has spoken – as it had by enacting the Survival Act – the Court must defer to it. Otherwise, the court encroaches on the law-making function of the legislature.

Another case lesson is that plaintiffs who have claims against dissolved companies should do all they can to ensure their claims are filed within the five-year post-dissolution period.  Otherwise, they risk having their claims time-barred.

 

Condo Association Sues Developer Based on False Statements In Sales Brochure and For Anemic Repair Reserves

In Henderson Square Condominium Association v. LAB Townhomes, LLC, 2014 IL App (1st) 130764, a condominium association sued the developer and contractor after unit owners discovered wide-ranging property defects in their units. (For Chicago readers: the project is near that nightmarish, multi-cornered Belmont-Lincoln-Ashland intersection on the North side).

The property’s construction was completed in 1996, the unit owners discovered the property defects in 2007-2008 and filed suit in 2011 – nearly 15 years after construction was finished and about 4 years after discovery of the defects.  The extent of the unit damage wasn’t revealed until a consultant hired by the association opened up the unit walls and ceilings. 

The association sued for breach of implied warranty of habitability, fraud, negligence, for violating the Chicago Municipal Code section (Section 13-72-030) governing real estate marketing misrepresentations.  The trial court dismissed all the claims as time-barred.  The association appealed.

Result: Trial court reversed.  Association’s claims reinstated

Rules/reasoning:

The basis for the reversal was the defendants’ possible fraudulent concealment of the association’s causes of action.  Code Section 13-214(a)and (b) provide a four-year limitations and 10-year repose period for construction-related claims, respectively.  The construction repose period can have harsh results: it means that no matter when a plaintiff discovers an injury, if more than 10 years have elapsed since construction was complete, the plaintiff’s claim is barred.

But Code section 13-214(e) provides that the repose period doesn’t apply where a defendant makes fraudulent misrepresentations or fraudulently conceals a plaintiff’s claim.  735 ILCS 5/13-214(e); ¶ 28.  When fraud is involved, the five-year limitations period set forth in Code Section 13-205 (735 ILCS 5/13-205) applies.  To demonstrate fraudulent concealment, a plaintiff must show silence coupled with deceptive conduct or the suppression of material facts.  ¶¶ 95-96. 

The Court found a question of fact as to whether there was active concealment based on (1) defendants’ marketing documents: a sales brochure that made specific statements concerning unit insulation; and (2) the anemic repair reserves earmarked by the developer for repairs.  The Court held that if the defendants didn’t inform the plaintiff that the units lacked insulation – as the plaintiff’s consultant found and noted in its report – and if the reserve levels weren’t large enough to meet anticipated future repairs, this could show fraudulent concealment sufficient to beat the repose period argument.  (¶¶ 98- 102).

The Court also sustained the association’s claims that were premised on Municipal Code.  Sections 13-72-030 and 13-72-100 of the Code provide a real estate buyer both with a private cause of action and damages remedy (including attorneys’ fees) where a seller makes misrepresentations in the course of marketing the sale of real estate; including condominiums.  The First District found that the association stated a cause of action under the Ordinance and rejected the defendants’ argument that the Ordinance claims were duplicative of the association’s fraud claims.  The Court found the Ordinance gave rise to a private right of action and provided an additional remedy to a common law fraud claim.  (¶¶112-113).

Validating the plaintiff’s breach of fiduciary duty claim, the Court looked to the Illinois Condominium Act (“Act”). Section 9.2 of the Act imposes a duty on a developer to adequately fund a reserve account for future improvements and repairs.  765 ILCS  605/9(c)(1), (2).  A “reasonable reserve” amount is a fact-based inquiry determined by (1) repair and replacement costs, and the (2) estimated remaining useful life of the property’s various structural, mechanical and energy components and its common elements.  (¶¶ 122-123, 129). 

The Court held that the question of whether the developer adequately funded the repairs reserve account wasn’t properly decided on a Section 2-615 motion.  And since the association properly pled that the developer breached fiduciary duties by failing to disclose known, latent defects in the property, the association stated a valid claim for breach of fiduciary duty (or at least one that survives a motion to dismiss).

Take-aways:

The Court found that a breach of fiduciary duty claim against a developer can survive almost 15 years after the developer’s last involvement with the property (the property was completed in 1996 and suit wasn’t filed until 2011).  The case also underscores the importance of adequately funding reserve accounts and demonstrates that claims premised on the City Ordinance sections governing false statements in real estate sales literature can be brought independently of common law fraud claims.  Henderson Square also illustrates the evidentiary showing a plaintiff must make to trigger the fraudulent concealment exception to the 10-year repose period applicable to construction claims.

Illinois’ Contribution Law and the ‘Savings’ Statute

Illinois has a 2 year statute of limitations (SOL) for contribution claims.  Contribution applies where two or more defendants have common liability to an injured plaintiff.  740 ILCS 100/1 (Illinois’s contribution statute).

The idea is that each defendant responsible for injuring a plaintiff should pay his share of liability to the plaintiff.  Section 13-204(b) of the Code prescribes the two year limitations period for contribution claims.

Another section of the Code of Civil Procedure, 735 ILCS 5/13-207 – labelled the “savings statute” – gives a defendant extra time to file an otherwise time-barred counterclaim or set-off under certain circumstances.

This statute protects against last minute filings by plaintiffs that would prevent a defendant from having a reasonable opportunity to assert counterclaims against that plaintiff.

Example: Assume plaintiff has personal injury claim against defendant and defendant has defamation claim against plaintiff arising from same underlying facts.  Illinois has a 2 year limitations period for personal injury claims (735 ILCS 5/13-202) and 1 year period for defamation (735 ILCS 5/13-201).  If plaintiff files personal injury suit on day 729 after he is injured and serves defendant some weeks later, the defendant’s defamation counterclaim would normally be barred since well over 1 year has elapsed from the underlying injury.  But, under the savings statute, the defendant now has 1 year from the date of service of plaintiff’s complaint to sue for defamation.

But consider this fact pattern: plaintiff serves defendant 1 on January 1, 2013 and serves defendant 2 on January 15, 2013.  Defendant 1 does not file any counterclaims.  Defendant 2 sues defendant 1 for contribution on January 14, 2015, the day before the 2-year SOL expires and defendant 1 is served on February 1, 2015.

Q:  Can defendant 1 now file a counterclaim for contribution against defendant 2 on or after February 1, 2015? Remember, defendant 1 was served with the underlying complaint on January 1, 2013 – so under 13-204(b)(see above), defendant 1 would have had until January 1, 2015 to file contribution counterclaims.  Clearly, defendant 1’s contribution action is time-barred by the 2-year SOL, right?

A: Wrong.  An off-shoot of the above fact pattern is exactly what the Illinois Supreme Court addressed in Barragan v. Casco case, 216 Ill.2d 435 (2005).  There, the Court reversed the Appellate Court and held that a contractor’s contribution counterclaim against a co-defendant architect could proceed even though it was time-barred under 13-204’s two-year SOL for contribution claims.

In Barragan, the plaintiff served the defendant contractor on July 25, 1997 and the defendant architect on September 15, 1997.  Under 13-204(b), the contractor and architect would have until July 25, 1999 and September 15, 1999 respectively to sue for contribution..  The architect filed its contribution claim against the contractor on July 29, 1999 – about six weeks before the 2-year limitations period expired.  The contractor filed its responsive contribution claim against the architect in December, 2000 – about 3.5 years after it was served by the underlying plaintiff and 16 months after the contribution 2-year limitations period expired.

The Court still permitted the contractor’s counterclaim to go forward under Code Section 13-207, the savings provision.  The  Court ruled that Section 13-207’s savings provision trumped the two-year SOL contained in Section 13-204(b) for contribution claims, noting that the contractor and architect were in an adversarial posture and that the contractor’s counterclaim was responsive to the architect’s.

Take-away: Personal injury defendants should be cognizant of Barragan and the interplay between 13-204 and 13-207.  If you – as a defendant – sue another defendant for contribution, be prepared for that defendant to counter-sue you for contribution beyond the 2-year limitations period.  This seems to penalize the timely filing defendant by allowing the contribution counter-defendant to circumvent the 2-year SOL for contribution.