Illinois Appellate Courts

First District Rules Auto Dealer Committed Fraud By Misrepresenting Car’s History

December 18, 2008 | Peter S. Lubin and Patrick Austermuehle

A statement that a car has not been involved in an accident and “it’s fine” can constitute common-law fraud and a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, the First District Court of Appeal has ruled. In Hanson-Suminski v. Rohrman Midwest Motors, Inc., 1-07-0755 (Nov. 7, 2008), a customer successfully sued after she discovered that her used car had been in an accident, even though the dealer who sold it to her had told her it was not. The appeals court rejected the dealership’s arguments that both the decision and the financial award were erroneous.

The plaintiff, Traci Hanson-Suminski, bought a used 2002 Honda Civic from defendant Arlington Acura in Palatine, Ill. On the test drive, she asked the salesman if the car had been in an accident, to which he replied “No, it’s fine.” She did not take the car to an independent mechanic or get a Carfax sheet, nor did the salesman advise her that she could do so. She discovered that the car had indeed been in a rollover accident causing “moderate or severe” damage the following year, when she tried to trade it in. At trial, witnesses testified that the car had a “green light” at the auction where the dealership bought it, indicating no title problems, but that a car in good condition should have been more expensive. The plaintiff prevailed on her common-law fraud claim at a jury trial and on her Consumer Fraud Act claim at a bench trial. To avoid an illegal double recovery, the judge ruled that the Consumer Fraud Act claim would be satisfied with the jury’s common-law fraud verdict.

On appeal, the defendant argued that the plaintiff should not have prevailed on her Consumer Fraud Act claim, in part because she failed to show that fraud could have been avoided with reasonable prudence, and because the salesman’s statement was mere “puffery.” In its opinion, the appeals court cited Harkala v. Wildwood Reality, Inc., 200 Ill. App. 3d 447, 453 (1990), to show that the plaintiff had no obligation to double-check the salesman’s statement that the car had not been in an accident. Furthermore, it said, a car’s accident history is not a matter of public knowledge, as that case required. “Puffery” is a legal term for exaggerations used in advertising, which no reasonable person would believe. Because it was reasonable to believe the salesman was not lying, and it is not reasonable to think that car salespeople always claim cars are accident-free, the court said, it dismissed the puffery claim as without merit.

Guarantors of Commercial Lease Are Liable Even After Lease Changes Hands, First District Rules

December 11, 2008 | Peter S. Lubin and Patrick Austermuehle

As Naperville, Oak Brook, Wheaton, and Chicago business trial lawyers with substantial experience in shopping center claims, we were interested to see a recent decision by the First District Court of Appeal on the obligations of people who guarantee a lease. A change in the lease and a directed verdict at trial do not relieve a couple of their liability as guarantors of a commercial lease, the court has ruled. In Chicago Exhibitors Corporation v. Jeepers! Of Illinois and Swento, 1-06-3313 (Aug. 30, 2007), the court ruled that a guaranty agreement written to survive changes to the lease is enforceable even if the lease is assigned to a new tenant who changes it without the guarantor’s approval.

Harvey and Cherry Swento owned a business that leased space from a predecessor landlord to Chicago Exhibitors Corporation (CEC). To sweeten that lease, the Swentos in 1991 personally guaranteed their lease payments and all of their other obligations as tenants, with a clause specifying that the guaranty would survive changes to or assignment of the lease. In 1997, they sold their business to Jeepers! of Illinois, Inc. and executed an agreement in which Jeepers! indemnified them from losses stemming from their personal guaranty. Jeepers! then failed to pay its rent, causing CEC to demand an amendment to the lease that reaffirmed the Swentos’ personal guaranty. CEC declined to recognize the transfer of lease obligations from the Swentos’ company to Jeepers! until rent was paid in full and Jeepers! executed its own guaranty.

Jeepers! never did take on the guaranty, but it failed to pay its rent again several times. In an effort to avoid eviction, it agreed to several changes to the lease in January of 2001. The Swentos did not sign this amendment, even though it called for the ratification of all guarantors. When CEC eventually sued Jeepers! for unpaid rent and repairs, it included the Swentos as guarantors. In the trial, the Swentos asserted that the January 2001 amendment was a material change that discharged them from their obligations as guarantors; CEC successfully moved in limine for a ruling that it was not. The parties then agreed to move straight to the damages phase of the trial, so the judge granted a directed verdict on liability. The Swentos were eventually found liable for unpaid rent and damages as well as attorney fees. They appealed the in limine motion, the directed verdict and the award of attorney fees.

Illinois Tenants Entitled to Interest on Security Deposit, Fifth District Rules

December 4, 2008 | Peter S. Lubin and Patrick Austermuehle

As Chicago class action attorneys, our firm has been able to help many Illinois tenants protect their rights under a special state law that not every renter knows about. The Illinois Security Deposit Interest Act requires many Illinois landlords to pay their renters the interest on security deposits. The law applies to landlords of buildings with 25 or more rental units, and to deposits held six months or more. Under those circumstances, the law requires landlords to pay interest on security deposits once a year, after the end of the yearly rental agreement, except when the renter owed unpaid rent. Landlords who willfully fail to do this can be sued for the amount of the withheld interest, as well as attorney fees and court costs.

That was the case in Wang v. Williams and Royal Rentals, 343 Ill.App.3d 495, 797 N.E.2d 179, 277 Ill.Dec. 832 (Sept. 10, 2003). Zhiyuan Wang of Carbondale sued his landlord, Royal Rentals, for failing to return his security deposit, failing to pay interest during the two years he rented from Royal, consumer fraud and breach of contract. The trial court dismissed his interest claim and his breach of contract claim, both of which were based on the Security Deposit Interest Act, because Wang’s lease included a provision stating “TENANTS agree to waive right to interest on security deposit.” Wang appealed to the Fifth District Court of Appeal.

On appeal, Royal Rentals argued that legal rights, including Wang’s rights under the Security Deposit Interest Act, can be waived when the right in question is conferred only for the benefit of individuals rather than the public. The court found this unconvincing. It pointed out that the Security Deposit Interest Act protects the rights of renters, a class of people. In support, it cited several cases, including Gittleman v. Create, Inc., 189 Ill. App. 3d 199, 545 N.E.2d 237, 240 (1989), a similar case in which tenants sued their landlord for a security deposit refund and interest. That lease had a provision reading “It is understood that the security deposit is net of security deposit interest, if any.” That court found for the tenants, saying the provision was intentionally vague about how interest should be paid and suggesting that the landlord used that vagueness to try to circumvent the Security Deposit Interest Act.

Restrictive Covenant Does Not Apply to Shopping Center Lease, Fourth District Decides

November 27, 2008 | Peter S. Lubin and Patrick Austermuehle

As Chicago business trial attorneys with substantial experience in disputes involving shopping centers, our firm was interested to see a recent Fourth District Court of Appeal decision allowing a shopping center to go through with its lease despite a restrictive covenant in a land sale by its predecessor. In Regency Commercial Associates v. Lopax, 4-06-0332 (May 4, 2007), the appeals court upheld the trial court’s ruling that the business at issue was not covered by the covenant, and that starting the lease while the case was still pending did not bar it from requesting a declaratory judgment.

Regency Commercial Associates, LLC and Lopax, Inc. are companies that own neighboring parcels of land in Savoy, Ill. The prior owner of Regency’s land, Arbours Development Limited Partnership, sold Lopax its land, which Lopax then leased to a Kentucky Fried Chicken franchisee. The sales contract between Lopax and Arbours restricted Arbours from allowing another “fast-food restaurant … or restaurant facility whose principal food product is chicken[.]” It also lists the types of businesses allowed, which include “casual dining.” Regency later purchased Arbours’ rights under the contract.

When Regency wanted to lease to a Buffalo Wild Wings restaurant, it negotiated with Lopax, arguing that the restaurant is “casual dining” and not fast food. Lopax disagreed, saying it believed the contract restricts any restaurant that primarily serves chicken. Regency filed for declaratory judgment, asking the court to find that Buffalo Wild Wings is not fast food and that the covenant restricts only fast-food restaurants that primarily sell chicken. Finding that there was a genuine issue of material fact to try, the court denied Lopax’s motion to dismiss.

Tenants Do Not Need to Prove Willful Violation of Chicago Ordinance to Recover Security Deposit Interest, First District Rules

November 20, 2008 | Peter S. Lubin and Patrick Austermuehle

As Chicago class action attorneys with a focus on consumer rights and consumer protection law, we know that renters in Chicago are fortunate to be protected by a law requiring landlords to pay interest on the renters’ own security deposits once a year, as long as the tenant stays for more than six months. Section 080 of the Chicago Residential Landlord and Tenant Ordinance (PDF) also specifies that landlords must return security deposits, minus unpaid rent or reasonable costs of repairs, within 45 days of the tenant’s departure. Unlike with the corresponding state law, this is true regardless of the number of units the landlord owns. If a landlord fails to comply, the tenant has the right to sue for twice the amount of the deposit, plus interest and attorneys’ fees.

The ordinance also applies even if the landlord did not willfully (that is, intentionally) withhold the payment. That provision was established by the decision of the First District Court of Appeal in Lawrence v. Regent Realty Group, 307 Ill.App.3d 155, 717 N.E.2d 443, 240 Ill.Dec. 350 (1999). In that case, Aurelia Lawrence sued her landlord for withholding interest on a pet deposit. At trial, the court decided that a pet deposit is a security deposit for the purposes of the law (rather than a fee or charge). But because the landlord didn’t willfully refuse to pay interest on that pet deposit, it declined to impose the penalty of twice the deposit plus interest and attorney fees. Lawrence moved for a new trial, which was denied, and appealed to the First District.

In its analysis, the appeals court noted that it did not need to decide whether the landlord actually did willfully fail to pay; what mattered was whether the ordinance required willfulness in the first place. In order to require willfulness, the court wrote, a law must be penal (intended to punish) rather than remedial (intended to make the victim whole). Both sides agreed that the case turned on the issue of penal versus remedial. The court first decided that its decision should not be controlled by Szpila v. Burke, 279 Ill. App. 3d 964, 665 N.E.2d 357 (1996), in which the appeals court decided that a tenant was entitled to damages once rather than for each separate violation of the ordinance. In that case, the First District said, it found willfulness because to do otherwise would give a result that was out of proportion to the violation and unjust. A similar case, Namur v. Habitat Co., 294 Ill. App. 3d 1007, 691 N.E.2d 782 (1998), was dismissed because it did not address the question at issue here.

Contribution Act Does Not Bar Breach of Fiduciary Duty Claim in Embezzlement Case

October 22, 2008 | Peter S. Lubin and Patrick Austermuehle

In a Chicago breach of contract and breach of fiduciary duty case, the Illinois First District Court of Appeal has ruled that an insurance company may sue a bank for allowing embezzlement from one of the insurer’s clients. Continental Casualty Company v. American National Bank and Trust Company of Chicago, No. 1-07-0627 (Sept. 25, 2008).

Continental Casualty Company is the assignee of General Automation, Inc. GAI was the victim of $1.32 million worth of embezzlement by an accountant, Lawrence Cohn, who deposited $370,000 of the stolen money into his own account at American National Bank. (He also embezzled by paying his client’s money directly to the IRS to cover his own taxes.) The checks drew on GAI’s corporate account, also at ANB. After Cohn was caught, his former accounting firms settled with GAI, but the bank did not. Continental Casualty, the insurer for one of Cohn’s former firms, sued ANB as GAI’s assignee for allowing the fraudulent deposits, for breach of contract and violation of the Illinois Fiduciary Obligations Act.

The trial court dismissed the case on statute-of-limitations and insufficiency grounds. The appeals court reversed and remanded, but the trial court again stopped the case, granting summary judgment to ANB because the Illinois Joint Tortfeasor Contribution Act bars settlement requests from a settling party to a nonsettling party. This was the subject of the instant appeal.

Using Forensic Accountants and Certified Fraud Examiners in Shareholder, Business, Divorce and Commerical Litigation

July 23, 2008 | Peter S. Lubin and Patrick Austermuehle

As Chicago business, shareholder rights and commercial law litigators, we frequently handle cases involving allegations of business fraud or financial mismanagement, often as part of complex business dispute, that require significant expertise in financial issues. When handling a divorce involving a family business or other closely held company, we also sometimes find we need an expert’s help properly valuing the business, so we can help our clients get the most equitable possible distribution of marital property.

Our Chicago, Oak Brook, Wheaton and Naperville business trial attorneys have handled many complex business and commecial law litigation matters which have involved presenting or cross-examining accounting witnesses.

While we’re confident in our legal skills, these situations call for specialized financial skills. To give our clients the best possible representation in business, shareholder and other commercial disputes, we sometimes retain a forensic accountant or fraud examiner. Both of these jobs are twofold: They help attorneys and their clients understand the complex financial aspects of their cases, and they may also be called to testify as expert witnesses. A forensic accountant’s job is to examine a person or corporation’s accounts “cold,” from the outside; the subject isn’t generally expected to cooperate. Similarly, a fraud examiner delves deep into a company’s finances, looking for the source of anything that seems inconsistent or suspicious. Both can serve as expert witnesses who help establish the value of a business or testify to the existence of fraud.

Will Executor’s Bad Faith Trumps Shareholder Stock Redemption Agreement By Decedent

July 21, 2008 | Peter S. Lubin and Patrick Austermuehle

In a shareholder and breach of fiduciary duty dispute arising from a probate case involving a closely held corporation with two shareholders, the Illinois Third District Court of Appeal has ruled that a shareholder agreement made by a decedent does not allow the remaining shareholder to execute the decedent’s will in bad faith. In re Estate of Talty, No. 3–06–0669 (Oct. 29, 2007).

Thomas Talty owned 50% of a closely held corporation (an auto dealership in Morris, Illinois), with his brother William Talty. They each also owned half of the land the dealership was built on, and had an interest in half of an adjoining parcel of land owned by a land trust. Thomas wrote a will in 2000 naming William as executor and naming Thomas’s wife, Helen Talty, as sole residual beneficiary of the estate.

The will gave William the right to purchase Thomas’s shares of the dealership from his estate, but required that the purchase price be determined by an independent appraiser appointed by the probate court. Similarly, it gave William the right to purchase Thomas’s half of the land, but at fair market value set by an independent appraiser approved by the probate court. Separately, in 2001, William and Thomas made a corporate agreement allowing their company to buy the shares of any deceased shareholder. It specified that the fair market value of the shares should be determined by an accountant agreed on by the company and the decedent’s representative, or, if they couldn’t agree, appointed by the probate court.

Shareholder May Withdraw Complaint, Appeals Court Rules in Corporate Dispute

July 18, 2008 | Peter S. Lubin and Patrick Austermuehle

A minority shareholder may withdraw his complaint under the Illinois Business Corporation Act of 1983, because the majority shareholder failed to meet requirements of that law, the Illinois Third District Court of Appeal ruled in an Illinois shareholder dispute lawsuit. Lohr v. Havens, 3-06-0930 (Nov. 11, 2007).

Charles Lohr owned a large minority of the stock in Phoenix Paper Products, Inc., a closely held private corporation in Illinois. He and another shareholder, James Durham, became concerned about possible financial mismanagement by the majority shareholder and president, Terry Havens, and their accountant, Samuel Morris. In months of correspondence, they accused Havens and Morris of taking unspecified inappropriate actions without shareholder approval.

This culminated in a 2003 lawsuit by Lohr alleging that Havens and Morris were misusing the company’s resources and acting illegally. Count I of the suit asked the court to either order a buyout of all Lohr’s stock or dissolve the company. Havens filed a timely election to buy Lohr’s shares, but Lohr accused Havens of illegally doing this without shareholder approval. After two years of discovery, Lohr asked to withdraw Count I and its associated demands, but Havens objected. The trial court found that because Havens hadn’t notified shareholders about the election, it was invalid, allowing Lohr to dismiss Count I of his complaint. Havens appealed.

LLC Members Owe Company, Manager No Fiduciary Duty, Appeals Court Rules

July 17, 2008 | Peter S. Lubin and Patrick Austermuehle

Only managers in manager-operated limited liability corporations have a fiduciary duty to the company or to other members, the First District Court of Appeal ruled in a usurpation of corporate opportunity lawsuit involving a closely held LLC. Katris v. Carroll, No. 1-04-3639 (Dec. 23, 2005).

Peter Katris was one of four members/officers and two managers of an Illinois limited liability corporation, Viper Execution Systems LLC. Viper LLC was formed to market a type of options-related software, also called Viper, written by LLC member Stephen Doherty for member Lester Szlendak. Its articles of organization specified that management was vested in Katris and the other manager, William Hamburg.

Defendant Patrick Carroll employed Doherty before and during the organization, and defendant Ernst & Company later hired Doherty to work with Carroll. Their work included the writing of another software program, WWOW, which Katris believed was functionally similar to Viper. Five years after the organization, Katris sued Carroll and Ernst for collusion and usurpation of corporate opportunity because of WWOW’s similarity to Viper. (He also sued Doherty for collusion and breach of fiduciary duty, claims they later settled.)