A Roadmap to Pursuing Fraudulent Transfer Actions: A.G. Cullen v. Burnham Partners, LLC

You’ve gone through all the work of litigating the case through pleadings, motions, discovery and, finally, either a dispositive motion or trial resulting in your client being awarded a long-sought monetary judgment.

Originally published in The Docket, May 2016
By Mark A. Van Donselaar

Stack of  american coins on the dollar banknotesYou’ve gone through all the work of litigating the case through pleadings, motions, discovery and, finally, either a dispositive motion or trial resulting in your client being awarded a long-sought monetary judgement. Feeling good about yourself and proud of your victory, you press onward into post-judgment collection. And then it hits you. It’s not uncommon. In fact, at times it’s almost expected, yet it’s demoralizing, nonetheless. All the time and effort that you’ve put into the case leads up to the situation that nearly every civil litigator has encountered: the dreaded uncollectible judgment debtor.

However, all is not lost when the judgment debtor explains that it does not have any income or assets. The opinion in A.G .Cullen Construction, Inc. v. Burnham Partners, LLC,1 (hereinafter “Cullen”) highlights three possible actions to take after a judgment debtor appears to be uncollectible: an action for violation of the Uniform Fraudulent Transfer Act, an action to pierce the corporate veil, and an action against the corporate officers, directors, members or manager for breach of fiduciary duty. Additionally and importantly, Cullen represents the first reported decision of an Illinois court piercing the corporate veil of a limited liability company, albeit while applying Delaware law.

The dispute in Cullen arose from the construction of a warehouse in Pennsylvania. Defendant, Westgate Ventures, LLC, hired A.G. Cullen Construction as its building contractor for the warehouse. Westgate was primarily owned by Defendant, Burnham Partners, LLC which, in turn, was owned by Defendant, Robert Halpin. Halpin signed the contract with Cullen on behalf of Westgate. Near the completion of construction, a disagreement arose between Cullen and Westgate, and Westgate refused to approve a payment of $360,000 to Cullen. The matter went to arbitration in July 2007, and in September 2007, Cullen obtained an arbitration award of$457,416.37 against Westgate which was then reduced to a judgment in Pennsylvania in November 2007.

In April 2007, prior to the arbitration hearing, Westgate sold the warehouse for $3.2 million. Westgate conducted no further business after the warehouse was sold, and Halpin undertook to liquidate its assets. First, Halpin paid the lender which had a secured interest in the warehouse over $2.5 million. Second, Halpin paid $120,000 to Northern Trust to repay a personal loan that he and his wife had made to Westgate. Third, Halpin paid a development fee of $400,000 to Burnham Partners, LLC, which was later transferred to Halpin, personally. Finally, Halpin gave $70,000 to himself and his wife. Those four transactions left Westgate with the Docket, May 2016 a balance of $27,530.44 which Halpin then transferred to himself in the same month that the arbitration with Cullen occurred.

Cullen then filed an action in the circuit court of Cook County to recover the amount owed on the Pennsylvania judgment. Cullen brought claims for fraudulent conveyance and breach of fiduciary duty, and also sought to pierce Westgate’s corporate veil to hold Burnham and the Halpins liable for the debt of Westgate. While the case was pending, Westgate filed for bankruptcy protection and thus the case only went to trial against Mr. and Mrs. Halpin and Burnham Partners, LLC. At the close of trial, the circuit court ruled against Cullen finding that Burnham and Westgate were separate entities that kept separate books and records. The circuit court also ruled that Burnham earned its $400,000 development fee and that the $175,000 that was repaid by Westgate to the Halpins was also appropriate.

The appellate court began its review by examining the claim alleging a fraudulent conveyance. The court noted that the Uniform Fraudulent Transfer Act2 is intended to allow a creditor to defeat a debtor’s transfer of assets to which the creditor is entitled.3 Claims under the UFTA are divided into two categories – fraud in fact and fraud in law.4 Claims brought under section 5(a)(1) of the UFTA are for actual fraud, referred to as “fraud in fact.”5 Such claims require a showing of an actual intent to hinder, delay or defraud creditors.6 The court noted that: [c]onstructive fraud or “fraud in law” does not require proof of actual intent to defraud. (citations omitted) “Rather, transfers made for less than reasonably equivalent value, leaving a debtor unable to meet its obligations, are deemed or presumed to be fraudulent.” (citation omitted) The test for determining the validity of a transfer under the UFTA is “whether or not it directly tended to or did impair the rights of creditors***. If the transfer hinders, delays, or defrauds his creditors, it may be set aside as fraudulent.” (citations omitted)7

The appellate court then reviewed the 11 factors specifically listed in section 5(b) of the UFTA that are to be considered in making a determination as to actual intent under section 5(a). Those factors are:

  • The transfer or obligation was to an insider;
  • The debtor retained possession or control of the property transferred after the transfer;
  • The transfer or obligation was disclosed or concealed;
  • Before the transfer was made or obligation was incurred, the debtor has been sued or threatened with suit;
  • The transfer was of substantially all the debtor’s assets;
  • The debtor absconded;
  • The debtor removed or concealed assets;
  • The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
  • The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
  • The transfer occurred shortly before or shortly after a substantial debt was incurred; and
  • The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.8

The appellate court commented that while proof of some or even all of the factors does not create a presumption that the debtor had the actual intent to defraud, “…the presence of these ‘badges of fraud’ may, in sufficient number, give rise to an inference or presumption of fraud.”9

However, the circuit court had not even considered the factors found in section 5(b) in making its decisions, but had simply ruled that Burnham and Westgate were separate entities.10 On review, the appellate court found that the evidence at trial had established a significant number of “badges” giving rise to the presumption of fraud.11 Specifically, the court found that Burnham and Robert and Lori Halpin were insiders of Westgate. Thus, the $400,000 payment of the development fee to Burnham was to an insider as were the payments to Robert and Lori Halpin.12 It also disagreed with the trial court’s acceptance of Halpin’s testimony that he had no reason to believe that Cullen would obtain the arbitration award that it did and the trial court’s finding that Halpin had acted in good faith. The appellate court found that Halpin knew of the threat of a lawsuit and judgment at the time he was winding up Westgate and that he had an obligation to not dissipate its assets as he did, especially without making any disclosures to Cullen. Furthermore, the appellate court found that Westgate did not receive “reasonably equivalent value” in exchange for the $400,000 development fee paid to Burnham or for the $120,000 transfer to Northern Trust to repay Halpin’s loan. With respect to the development fee, the appellate court found that Burnham and Halpin were already obligated to perform the services for which they were compensated as the majority owner of Westgate. The court also noted that Halpin failed to present any invoice or other evidence showing what services Burnham actually performed that were above and beyond what it was already required to do that warranted the $400,000 fee.

As to the alleged loan repayments, the court quoted Northwestern Memorial Hospital v. Sharif13 stating that, just as in Sharif, Halpin “failed to present objective, unbiased testimony or documentary evidence, e.g. cancelled checks, bank transfers, loan agreements, to support his contention that these transfers to himself were credible loan repayments to a bona fide creditor.” It also noted that in transferring money to the Northern Trust to repay the Halpins loans, Westgate did not receive reasonably equivalent value for the payment; in reality, Westgate was actually repaying a capital contribution that Burnham had been required under the LLC agreement to make, but which the Halpins had instead loaned to Westgate. It also held that Westgate’s transfers of all of its assets to Burnham and then to the Halpins just before Cullen obtained a judgment against Westgate impaired Cullen’s rights and were in violation of the UFTA.

Turning to the issue of whether Westgate’s corporate veil should be pierced, the court noted that under Illinois law, the law of the state of incorporation governs that issue.14 Westgate was a Delaware corporation. The court noted that Delaware courts do not lightly disregard the corporate form, but that the veil may be pierced when there is fraud or when a subsidiary is an alter ego of a parent.15 The court went on to find that the fraud on the part of Westgate as to the transfers made to Burnham and Halpin raised a “strong presumption for piercing the corporate veil.”16 Therefore, the appellate court reversed the trial court’s decision denying the plaintiff’s request to pierce Westgate’s corporate veil.

Finally, the court addressed the claim for breach of fiduciary duty against Halpin. The trial court had found no breach. The appellate court held that once Westgate became insolvent, Halpin “owed a fiduciary duty to Cullen, as a creditor of Westgate, to manage its assets properly and in the best interest of creditors.”17 The court further held that when a corporation becomes insolvent, as Westgate had, its assets are deemed to be held in trust for the benefit of its creditors.18 Halpin breached that duty by making transfers to himself, his wife and Burnham that left Westgate without assets to pay the amount owed to Cullen.19

The takeaway from Cullen is, on one hand, very simple and on the other, not simple at all. The simple point is that all is not necessarily lost when your client is faced with a debtor who appears to have no assets and is therefore judgment-proof. The more difficult part is that it takes a lot of work to learn and obtain the facts and information necessary to put together a claim such as the ones brought in the Cullen case. Obviously, cases brought for breach of fiduciary duty, to pierce a corporate veil or for violation of the UFTA will vary greatly based on the facts of the situation. The good news is that such actions are viable in the right circumstances for attorneys and clients who have the tenacity and ability to uncover the relevant facts and are able to allege valid theories of recovery based upon them.


Podcast: Home Repairs Gone Awry

How can homeowners protect themselves from unscrupulous home repair/remodeling contractors? Expert litigator Mark Van Donselaar outlines what homeowners can do before, during and after a home repair or remodeling to ensure that they are protected against home repairs gone awry.

How can homeowners protect themselves from unscrupulous home repair/remodeling contractors? Expert litigator Mark Van Donselaar outlines what homeowners can do before, during and after a home repair or remodeling to ensure that they are protected against home repairs gone awry. Van Donselaar has handled many home repair cases as an attorney with the Grayslake firm of Churchill, Quinn, Richtman & Hamilton.

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Recent Case Demonstrates Potential Perils for Subcontractors Under the Mechanics Lien Act

Imagine the frustration of having a set of strict statutory requirements for a cause of action, meeting those strict requirements, but still failing in the underlying cause of action. Such a frustrating result is entirely possible under the provisions of the Mechanics Lien Act1 (the Act) and the case law interpreting the Act.

Originally published in The Docket, July 2013
By Mark A. Van Donselaar

Depth of field. Great processing photos.Used professional equipment.

Imagine the frustration of having a set of strict statutory requirements for a cause of action, meeting those strict requirements, but still failing in the underlying cause of action. Such a frustrating result is entirely possible under the provisions of the Mechanics Lien Act1 (the Act) and the case law interpreting the Act. The recent Second District Appellate Court opinion in Doors Acquisition, LLC v. Rockford Structures Construction Company2 provides a classic example of how a mechanics lien claimant can fully comply with the provisions of the Act but still have its mechanics lien foreclosure action fall short. This article will examine the holding in Doors Acquisition and provide advice for practitioners and mechanics lien claimants seeking to avoid the unfortunate result of Doors Acquisition.

Before examining the holding in Doors Acquisition, it is worthwhile to briefly examine what the Act requires for a subcontractor to perfect its mechanics lien rights. To be entitled to a mechanics lien, a subcontractor (1) must have a valid contract; (2) the contract must be with a party considered to be an original contractor under the Act; (3) the contract must be for the purpose of furnishing lienable materials or services: and (4) the subcontractor must substantially perform the contract or have a valid excuse for non-performance.3

Meeting the first four prerequisites simply entitles a subcontractor to mechanics lien rights. To perfect those rights a subcontractor must send notice of its lien in accordance with section 24 of the Act.4 Notice may be sent any time after the parties enter into a contract to perform work and must be sent within 90 days of the last day that work is performed.5 Perfection of the lien also requires that the actual lien claim be recorded within four months of last performing work. The recorded lien claim must be verified by affidavit of the claimant, contain a brief statement of the claimant’s contract, set forth the balance due, and provide a sufficiently correct description of the real estate involved.6 As an alternative to recording the claim for lien, a lien claimant may also bring an action to enforce its lien within four months of last performing work.7

With an understanding of what a subcontractor must do to perfect its mechanics lienrights, we can venture into the facts of Doors Acquisition. The facts are not complicated. Norman J. Weitzel and Rockford Structures Construction Company entered into a contract for the construction of a hotel. Rockford Structures was the general contractor for the project. Rockford Structures contracted with D&P Chicago, Inc. to supply, install, and finish the drywall for the project. D&P employed 30 members of District Counsel No. 30 of the International Union of Painters and Allied Trades, AFL-CIO (the Union) to perform work under D&P’s contract with

In November of 2007, Rockford Structures terminated D&P. At the time D&P was terminated, D&P owed the Union $6,591.30 for wages and $17,003.98 for benefits. The unpaid wages and benefits were for work performed from August 2007 through November 9, 2007. On January 10, 2008, Rockford Structures provided a sworn statement to Weitzel stating that D&P had been paid in full for the work that it performed and that D&P’s work on the project was complete. On March 6, 2008, the Union filed its mechanics lien in the amount of $23,595.28.

The lien was served on Weitzel, Rockford Structures, and D&P. When notice of the lien was received by Weitzel, he was unaware that D&P had failed to pay the Union for its wages and benefits. The opinion does not say when Weitzel received notice of the lien. We are left to assume that the notice was sent within 90 days of November 9, 2007, because if it was sent any later than that, the lien would have been defective for failing to comply with section 24 of the Act.

The circuit court ruled that the Union had a valid lien and ordered Weitzel to pay the Union or the sheriff would execute a judgment of foreclosure. The order included final and appealable language, and Weitzel appealed.

The only issue on appeal was whether the lien was valid. Weitzel argued that the lien was invalid because the Union could only recover the amount owed to its immediate contractor,D&P, and that D&P had been paid in full when he received notice of the Union’s lien. The Union argued that its lien was valid because, when Weitzel received notice of the Union’s lien, Weitzel owed Rockford Structures money for work performed.

The appellate court began its analysis by examining sections 5, 21, 24, and 27 of the Act. Section 5 of the Act8 provides that prior to any funds being paid to a general contractor, the general contractor shall provide the owner with a sworn statement of the names and addresses of all subcontractors involved in the project and the amount due or to become due each. Section 219 provides that subcontractors shall have a lien for the value of the services that they provide to the project and on the funds due or to become due from the owner under the original contract. Section 2410 provides that at any time after starting work on the project and within 90 days of completing its work, subcontractors must send notice of their claim for lien. Such notice must be sent to the owner and any lender with an interest in the property being improved.11 Finally, section 2712 provides that when an owner has notice of a subcontractor’s lien claim, he shall retain sufficient funds due or to become due to the contractor to pay the demands of the subcontractor.

The appellate court then looked to Weather-Tite, Inc. v. University of St. Francis, 223 Ill. 2d 385 (2009) for an example of how the foregoing provisions of the Act work in every day practice. In Weather-Tite the defendant, a university, hired a general contractor to renovate a residence hall. The general contractor hired a subcontractor, Excel, to perform electrical work. On five occasions the general contractor requested a payment from the owner and submitted a sworn statement pursuant to section 5 of the Act with each request. Each sworn statement to the owner listed Excel and the amount due to Excel. After receiving the first four requests, the university paid the general contractor the full amount owed it, including the amount owed to Excel. The general contractor paid Excel. However, the fifth pay request didn’t go as smoothly as the first four requests. The university paid the general contractor, but the general contractor’s bank applied part of the payment received to a debt that it was owed. As a result, Excel was not paid out of the fifth payment that the general contractor received.

Excel filed its mechanics lien, and the supreme court concluded that it was entitled to its lien. The supreme court found that the purpose of the sworn statement required by section 5 of the Act was to put an owner on notice of a subcontractor’s claim, and section 27 created a duty upon the owner to pay the claim of subcontractors named in the sworn statement. Thus, the university could not pay the general contractor and rely upon the general contractor to properly disburse the funds to its subcontractors without running the risk of being subject to a lien of a subcontractor who was not paid. Excel’s lien was found validly perfected.

The appellate court also examined the holding in Bricks, Inc. v. C&F Developers, Inc., 361 Ill. App. 3d 157 (1 st Dist. 2005). In Bricks a material supplier for a subcontractor was not paid by the subcontractor and asserted a lien for the balance owed. The sworn statement that the general contractor provided to the owner did not list the material supplier and listed the subcontractor as being owed an amount much less than was owed to the material supplier. The material supplier did all that was required of it to perfect its mechanics lien rights. The court in Bricks found that the purpose of the Act is not only to protect the rights of those furnishing materials and labor to a project but also to protect owners from potential claims. The court was forced to rule between a lien claimant who had done all that was required to perfect its lien claim and an owner who had unknowingly been provided with incomplete sworn statements and had relied upon them. The court ruled in favor of the owner and limited the material supplier’s lien to the extent owed the subcontractor – an amount less than was actually due the material supplier.

The union relied upon A.Y. McDonald Manufacturing Co. v. State Farm Mutual Automobile Insurance Co.13 and Struebing Construction Co. v. Golub-Lake Shore Place Corp.14 in support of the validity of its lien. However, the court found the facts of both cases to be distinguishable. In A.Y. McDonald, the owner admitted that it had not obtained a sworn statement pursuant to section 5 of the Act. That fact was an important distinction from the facts in Doors Acquisition where the owner had obtained a sworn statement and it showed the lien claimant’s immediate contractors to have been paid in full. In Struebing the lien claimant was not listed on the sworn statement provided to the owner. However, the owner still had notice of the lien claimant’s involvement in the project. Again, this was a distinguishing fact from Doors Acquisition where the owner was not aware of the Union’s role in the project until receiving notice of its lien.

Ultimately, the appellate court in Doors Acquisition found the reasoning in Bricks to be persuasive. The court found that the Act seeks to strike a balance between the rights of owners, contractors and subcontractors. The court found that one way an owner’s rights are protected is by allowing owners to rely upon sworn statements provided to them pursuant to section 5 of the Act. Thus, the balance will be struck in favor of an owner who has properly received a sworn statement over an equally deserving subcontractor who has not been paid in full.

With the harsh result of Doors Acquisition in mind, we turn to what subcontractors can do to avoid such perils. The solution can be summarized in two words – provide notice. After an owner has received notice of a subcontractor’s involvement in the project, the owner must retain sufficient funds to pay what is due the subcontractor. As stated above, section 24 of the Act allows a subcontractor to provide notice to the owner of their claim any time after making the contract with the general contractor. While section 24 allows notice to be sent up to 90 days after the completion of the work, it can also be sent much sooner. In practice, most subcontractors don’t even think about providing notice of their lien until the project is complete. By waiting until the limits of time allowed by section 24 nears, intervening factors such as those present in Doors Acquisition can be fatal to a subcontractor’s claim. The far safer practice is for subcontractors to provide owners with notice of their involvement and role in the project early on in the construction project.


How a Guarantor Became a Surety

A long-time business client calls you with a question about a contract that he is about to enter into on behalf of his business. The party with whom he is contracting is demanding that the contract include either your client’s personal guaranty, or that your client act as a surety for any debt owed under the contract.

Originally published in The Docket, March 2009
By Mark A. Van Donselaar

123737188A long-time business client calls you with a question about a contract that he is about to enter into on behalf of his business. The party with whom he is contracting is demanding that the contract include either your client’s personal guaranty, or that your client act as a surety for any debt owed under the contract. Being a layman, your client does not know the difference between a personal guaranty and a surety, so he wants you to explain the difference. This article will do just that, while focusing on the recent Second District Appellate Court case, JP Morgan Chase Bank, N.A. v. Earth Foods, Inc.,1 which blurs the line between the two. (The Illinois Supreme Court granted leave to appeal on January 28, 2009.)

“There is substantial distinction between the liability of a surety and that of a guarantor. A surety’s undertaking is an original one, by which he becomes primarily liable with the principle debtor, while a guarantor is not a party to the principal obligation and bears only a secondary liability.”2 Stated somewhat differently, the distinction between a suretyship and guaranty is that “a surety is in the first instance answerable for the debt for which he makes himself responsible, while a guarantor is only liable where default is made by the party whose undertaking is guaranteed.”3 A contract is “one of suretyship when one obligates himself to pay the obligee, absolutely and wholly, without the necessity that the obligee exhaust his remedies against the principal before proceeding against the surety.”4 A guaranty is “an undertaking to be responsible for the performance of an obligation of a third person upon his failure to perform it.” 5

Whether the obligation assumed by a party is that of a guarantor or a surety “is to be determined by the intent of the parties as collected from the language of the instrument and the circumstances attending its execution.”6 Where the express terms of the instrument are ambiguous, “the parties’ intentions can be determined from their declarations and conduct andfrom the surrounding circumstances.”7 Where the terms of the instrument are unclear and there are questions of the parties’ intent, parole evidence may be used to determine whether the contract at issue is a surety or a guaranty.8

The word “guarantee” is frequently used interchangeably with the word “surety.”9 “The  terms ‘suretyship’ and ‘guaranty’ are often confounded from the fact that the guarantor is in common acceptation a surety for another.”10 Thus, the determination of whether a contract is a surety or a guaranty does not depend upon technical language, such as security, surety, guaranty, or guarantee, which may be used in the contract.11 To ignore the circumstances in which such terms are used attaches too much importance to them.12 It is the nature of the obligation, whether primary, which would indicate a surety, or secondary, which would indicate a guaranty that is the determinative factor for distinguishing between a surety and a guaranty.13

Perhaps the most significant distinction between a guaranty and a surety is that a surety may avail himself of the protections afforded by the Sureties Act.14 The Sureties Act was first passed in 1874.15 Section 1 of the Act provides:

When any person is bound, in writing, as surety for another for the payment of money, or the performance of any other contract, apprehends that his principal is likely to become insolvent or to remove himself from the state, without discharging the contract, if a right of action has accrued on the contract, he may, in writing, require the creditor to sue forthwith upon the same; and unless such creditor, within a reasonable time and with due diligence, commences an action thereon, and prosecutes the same to final judgment and proceeds with the enforcement thereof, the surety shall be discharged; but such discharge shall not in any case affect the rights of the creditor against the principal debtor.16

In Wurster et.al. v. Albrecht17 the Appellate Court for the Second District examined the section of the Sureties Act quoted above and found that if not for the statutory provision, the holder of the note would not be required to comply with the surety’s demand to sue. However, the “statute was undoubtedly enacted for the purpose of compelling diligence by a creditor to the end that a surety may be protected against loss.”18 Thus, if demand is made by the surety under the provisions of the Section 1 of the Sureties Act and a lawsuit is not diligently brought by the creditor, then the surety may be protected from liability to the creditor.

It was not until the Second District Appellate Court’s decision in JP Morgan Chase Bank, N.A. that the protections of the Sureties Act have been extended to apply to a guarantor. The facts of JP Morgan Chase Bank, N.A. are stated fairly simply: the plaintiff in the case extended a line of credit to the primary defendant, Earth Foods, Inc. (Earth Foods), which was “personally guaranteed” by three co-owners of Earth Foods.19 The defendants sent the plaintiff a  letter in which they warned that Earth Foods was depleting its inventory and demanded that the plaintiff take action. When the plaintiff filed suit against Earth Foods and the co-guarantors, the co-guarantors responded by asserting an affirmative defense based on the protections found in Section 1 of the Sureties Act.

The circuit court granted the plaintiff’s motion for summary judgment on the ground that defendants were guarantors, not sureties, and, therefore, the Sureties Act did not apply. On appeal, the defendants argued, in part, that the circuit court erred when it found that the provisions of the Sureties Act did not apply. The Plaintiff countered with its successful argument in the circuit court that the Sureties Act did not apply because the defendants were guarantors, not sureties.

For its analysis, the appellate court turned to Black’s Law Dictionary for the definition of “surety,” which it found to be “[a] person who is primarily liable for the payment of another’s debt or the performance of another’s obligation.”20 The court quoted further from Black’s, noting that “[a] surety differs from a guarantor, who is liable to the creditor only if the debtor does not meet the duties owed to the creditor; the surety is directly liable.”21 The appellate court reasoned that the definitions found in Black’s Law Dictionary supported the plaintiff’s argument that sureties are distinct from guarantors.22

However, that did not end the court’s examination of the relationship between sureties and guarantors, though it did seemingly end any chance the plaintiff had of prevailing. The court went on to state that “the dictionary definition [of the term surety] does not in this case provide the ‘popularly understood’ meaning of the term.”23 After alluding to the fact that it did not agree with the definition of the word “surety” found in Black’s Law Dictionary, the court set out on an extended analysis of the use of the words surety and guaranty.

As part of its analysis, the court found that “[t]he terms suretyship and guaranty are often confounded from the fact that the guarantor is in common acceptation a surety for another, and thus the word guarantee is frequently used interchangeably with the word surety.”24 The court continued its analysis and found Illinois cases that have used the term surety in a general sense and those that have used the term in a specific sense.25 Used in its general sense, the term surety has been used to describe “a relationship in which a person undertakes an obligation of another who is also under an obligation or duty to the creditor/obligee.”26 Used more specifically, surety has been used to describe a contract in which the surety is in the first instance answerable for the debt for which he makes himself responsible, as opposed to a guarantor, who is only liable where default is made by the party whose undertaking is guaranteed.27 Accordingly, the court concluded that the term surety “has more than one popularly understood meaning.”28 The term surety could refer to any situation in which a person agreed to be held liable for the debt of another, whether the liability was primary or secondary.29 It could also be used to refer strictly to a surety, who is primarily liable.30

The court continued its examination to focus on when liability attaches to either a surety or a guaranty. A surety is primarily liable as though there is joint and several liabilities with the principal.31 The exact moment that a guarantor becomes liable for the debt of the principal is less certain.32 Some cases stand for the proposition that a guarantor’s liability is only triggered after the creditor has proceeded against the principal and failed to receive full satisfaction.33 Other authority holds that a guarantor’s liability is triggered by the principal’s default, regardless of attempts by the creditor to recover from the principal.34 The court found the position that imposes liability regardless of the creditor’s collection efforts to be the more persuasive position.35 In light of its determination that liability is imposed against a guarantor upon the principal’s default, regardless of attempts against the guarantor’s principal, the Court reasoned that any differences between primary liability of a surety and secondary liability of a guarantor appear to be only academic.36

After the analysis described above, the Court circled back to the issue of whether the legislature intended to distinguish between a surety and a guaranty or whether the legislature meant to use the term surety in its general sense to describe both surety and guaranty scenarios. The court concluded that based upon the intertwined use of the terms guaranty and surety and the confusion surrounding the use of the term surety, the “legislature did not mean to draw the type of precise distinctions we discussed above, but instead used the word in its general sense.”37 That court offered no authority for its determination of what the legislature intended.

It would seem that the very essence of the legislature is to make precise distinctions between divergent positions in the statutes that it enacts. Certainly, some statutes allow for more than one reasonable interpretation. However, where the legislature has specifically used a single, precisely defined term and left out another related, yet distinctly different, term, it would seem  that the statute should be read to include only the term that has been used to the exclusion of the unused term.

An example of the fine distinctions made by the legislature and enforced by the appellate court is demonstrated in Micro Switch Employees’ Credit Union v. Collier.38 In that case, the plaintiff loaned $7,300 to the defendant for him to purchase a car from a car dealer. The defendant fell into arrears, so the plaintiff repossessed the car and filed suit for certification of title and judgment in the amount owed on the loan. The circuit court granted judgment in the plaintiff’s favor, and the defendant appealed arguing that the Motor Vehicle Retail Installment Sales Act (“MVRISA”) applied to the transaction and that the plaintiff violated the provisions of the MVRISA with respect to the notice required to be provided to the defendant.

On review, the appellate court found that the MVRISA did not apply to the transaction because it only applied to purchasers of automobiles who buy from a dealer under a retail installment transaction.39 The court ruled that the plaintiff was not a retail seller under the definitions of the MVRISA because it was not engaged in the business of selling motor vehicles.40 Additionally, the defendant paid the automobile dealer the total amount of the purchase in a single payment, so the transaction at issue did not fit the definition of a retail installment transaction.41

Despite the fact that the definitions found in MVRISA clearly did not support its applicability to the scenario at hand, the defendant in Micro Switch Employees’ Credit Union continued to argue that the statute should apply to his situation because the purpose of the MVRISA was “to protect the buyer from the myriad of oppressive practices which, under the best of circumstances, seems to characterize installment selling.”42 But the court remained firm in its holding that the statute did not apply. “While the purpose of [MVRISA] may seem to warrant including agencies like Micro Switch which make installment loans for car purchases, it is clear that the legislature has chosen to include only retail sellers and sales finance agencies. The language of the statute is clear and precise. Had the legislature intended to include lenders such as the plaintiff, it would have done so. Where the language of the Act is certain and unambiguous, the only legitimate function of the courts is to enforce the law as enacted by the legislature.”43

Though the language of the statute at issue in Micro Switch Employees’ Credit Union may not have the history of double use that the term surety has, it is difficult to determine how the language of the Sureties Act is any less certain than that of the MVRISA that would prompt the court to step outside of the clear language of the statute and apply it to guarantors as well as sureties.

As support for its decision, the court notes that the Sureties Act was created “to compel diligence by a creditor to make certain a surety is protected against loss” and that such purposes would be better served by extending such protections to guarantors and sureties.44 The court continued, “Given the [Sureties] Act’s purpose, which applies to sureties and guarantors alike, and given the exceptionally close relationship between those two terms, we agree with defendant’s position that the legislature must have intended the word ‘surety’ in the [Sureties] Act to encompass a guarantor.”45 The court did not make reference to any Illinois authority for its determination that the Sureties Act should apply to guarantors as well as sureties. However, it did refer to a decision from the First Circuit of the United States Court of Appeals that interpreted the Sureties Act and found that is applied to guarantors and sureties alike.

When asked by a client for advice regarding surety and guaranty agreements, the Illinois practitioner would be wise to advise his clients as to the differences between sureties and guarantees as they relate to the applicability of the Sureties Act. Additionally, as long as JP Morgan Chase Bank, N.A. remains authority, clients should also be counseled that a court may determine that the Sureties Act applies to both surety and guaranty agreements.

Checking in on an Application of the Continuing Violation Rule

In cases involving stolen checks, the appellate districts split on the application of the “continuing violation rule.”
Beware, plaintiffs’ attorneys: the statute of limitations for filing an action for the conversion of several negotiable instruments may, in effect, be shortening.

Originally published in The Docket, November 2007
by Mark A. Van Donselaar

In cases involving stolen checks, the appellate districts split on the application of the “continuing violation rule”.

525877032Beware, plaintiffs’ attorneys: the statute of limitations for filing an action for the conversion of several negotiable instruments may, in effect, be shortening.  The reduction will not be the result of an amendment to the actual statute of limitations itself.  Rather, the source stems from court rulings on the applicability of the continuing violation rule to cases involving the conversion of multiple negotiable instruments over a protracted period of time.

Since 1993, persons who have had a series of negotiable instruments stolen from them have been permitted to rely on the application of continuing violation rule to, in effect, extend the statute of limitations for filing an action based on the converted checks. However, the First Appellate District’s recent decision in Kidney Cancer Ass’n v. North Shore Community Bank & Trust Company1 has created a split between the appellate districts as to whether the continuing violation rule applies to cases where multiple negotiable instruments have been converted in what a plaintiff alleges to be a common plan or scheme by a single defendant.  This article will review Illinois and Seventh Circuit cases pertaining to the continuing violation rule, and discuss whether the rule applies to situations where a series of negotiable instruments have been converted.

Generally, a cause of action for conversion of personal property must be brought within five years of the cause of action accruing.2 However, section 3-118(g) of the Uniform Commercial Code – Negotiable Instruments3 provides that actions for conversion of a negotiable instrument must be commenced within three years of the action accruing.4 When faced with two statutes of limitations that arguably both apply to the same cause of action, the statute of limitation that more specifically relates to the action must be applied.5 Therefore, the limitations period for actions for conversion of negotiable instruments is three years, as set out by 810 ILCS 5/3-118(g).6

Usually, the statute of limitations begins to run when facts exist that would authorize one party to maintain an action against another.7 But, under the “continuing violation” or “continuing tort” rule, the statute of limitations is put on hold, so to speak, until the last injury has been suffered and the tortious acts have ceased.8

Field v. First Nat’l Bank of Harrisburg9 was the first Illinois case to face the issue of whether the continuing violation rule applies to the conversion of a series of checks.10 In Field, the administrator of the estate of Raymond Ewell Field brought suit against Field’s sister and the bank where she deposited checks into her own account that were payable to their father and restrictively endorsed, “for deposit only.”  The plaintiff alleged that over the course of four years, numerous checks payable to Raymond and restrictively endorsed were deposited into his daughter’s accounts and then put to her own use.

The primary issue in Field was whether the alleged course of conduct was one transaction or numerous separate transactions for purposes of the calculating when the statute of limitations began.11 The trial court granted partial summary judgment, finding that the statute of limitations barred any action based on conduct that occurred more than five years prior to the lawsuit being filed.12 (Why the trial court used the more general five-year statute of limitations which applies to most actions for conversion of personal property, rather than the three-year statute of limitations set out in the provisions of the Uniform Commercial Code – Negotiable Instruments is not explained in the appellate court’s opinion.)

The appellate court reversed, agreeing with the plaintiff that the alleged course of conduct was one continuous transaction or scheme for determining the commencement of the statute of limitations.13 The appellate court based its finding on the fact that the checks were cashed by the sister, continuously over a four-year period, despite each check being payable to Raymond and each being restrictively endorsed “For Deposit Only.”14 Thus, Field established the precedent that when several checks are stolen as part of a single plan or scheme, the continuous tort rule applies and the statute of limitations for actions based on the checks does not run until the last check has been stolen.

Subsequent to Field, the Illinois Supreme Court analyzed the continuing tort rule in Feltmeier v. Feltmeier,15 in which the Supreme Court of Illinois ruled on the applicability of the continuing violation rule with respect to the tort of intentional infliction of emotional distress (IIED).  In Feltmeier, a woman sued her ex-husband for IIED. The complaint alleged that from October 1986 until after December 1998, the ex-husband had intentionally caused emotional distress to the woman or acted with reckless disregard as to whether his conduct would cause emotional distress to her.  The ex-husband filed a §2-619 motion to dismiss, claiming that a majority of the facts alleged were not actionable because the statute of limitations had run.  The woman responded by arguing that the ex-husband’s actions constituted a “continuing tort” for purposes of the statute of limitations, and that her complaint was filed within the two years of the last tortious act committed by her ex-husband.

The Supreme Court began by explaining that under the continuing violation or continuing tort rule, the limitations period does not begin to run until the date of the last injury or the date that the tortious acts cease.16 The Court clarified that a continuing violation or tort is found when there are continuing unlawful acts or conduct, not simply continued ill effects from a single unlawful act.17 Therefore, the Court found that if the alleged actions of a defendant are each a separate violation rather than one continuous, unbroken violation, then the continuing violation rule is not applicable.18 Furthermore, the Court explained that the continuing tort rule does not involve tolling the statute of limitations as a result of delayed or continuing injuries. Instead, the court viewed the alleged wrong as a continuous whole.19 As to whether a particular set of actions will be considered a continuous tort rather than a number of individual, actionable torts, the Court seemed to reason that an action for IIED is often a claim that arises out of the accumulation of several distinct acts.20 The Court explained that it would be inconsistent to find that the cumulative effect of several acts gives rise to a claim for IIED, but that the statute of limitations for IIED runs from the date of each separate act.21

The same rationale would not seem to apply to a situation involving the conversion of several negotiable instruments. Arguably, the disparity between the facts in Feltmeier and those in most cases involving converted negotiable instruments makes Feltmeier distinguishable.  However, Feltmeier is still relevant to a case brought for conversion of negotiable instruments because the Court in Feltmeier cited Field and noted its holding.22 It seems highly unlikely that the Illinois Supreme Court would cite to an appellate court case as authority for a particular proposition and make note of the lower court’s opinion if it did not agree with the opinion rendered by the appellate court.  Therefore, Feltmeier is relevant to the situation where several negotiable instruments have been converted as part of a common plan or scheme.

In Rodrigue v. Olin Employees Credit Union,23 the Seventh Circuit addressed the issue of whether the continuing tort rule should apply to a case where 269 checks were stolen over the course of more than seven years.  Though Rodrigue is not binding authority in Illinois state courts,24 the Seventh Circuit stated that it was required to apply the law as it believed the Illinois Supreme Court would if it were deciding the same case.25 The district court judge had followed Field and applied the continuing tort rule, awarding damages based on all 269 checks, even though more than three years had passed between the time that many of the checks were converted and the lawsuit was filed.  The Seventh Circuit began by examining Field and found that the case clearly supported the district court’s ruling.26 However, the court was not convinced that the Illinois Supreme Court would also agree with Field.27

Instead, the Seventh Circuit compared Feltmeier, where the continuing tort rule was applied, with the Illinois Supreme Court Case Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc.28 where the continuing tort rule was not applied, and reasoned that the Illinois Supreme Court would not apply the continuing tort rule to a cause of action for conversion of several negotiable instruments.29 The key factor in the court’s determination was that the plaintiff’s claim did not depend upon the cumulative nature of the defendant’s actions.30 Rather, the conversion of each check was an independent, actionable wrong.31 In fact, the court went so far as to say that the fact that over 200 checks were converted during an 85-month period was irrelevant as far as the plaintiff’s right to sue for conversion.32 In the court’s opinion, whether one check or 100 had been converted, nothing about the repeated, ongoing conversions changed the plaintiff’s claim for conversion apart from increasing her damages.33/sup>

The Seventh Circuit noted that the Illinois Supreme Court cited Field in its Feltmeier opinion, but found the citation to be for “illustrative purposes only.”34 Therefore, the court did not find Feltmeier to be an endorsement of the holding reached in Field, or an indication of how the Illinois Supreme Court would decide the question of whether to apply the continuing tort rule to the conversion of several negotiable instruments.35

Finally, the appellate court noted that the plaintiff did not argue that her claim was timely based on the discovery rule.36 The court found that, similar to the discovery rule, the continuing tort rule is based, at least partially, on the idea that where a cause of action arises from the cumulative nature or impact of a series of acts over time, it can be difficult to discern the wrongfulness of the defendant’s acts while they are still occurring.37 Because of similarities between the continuous tort rule and the discovery rule, the court examined whether the discovery rule had been applied to a situation involving the conversion of negotiable instruments and found that Illinois and a majority of other jurisdictions have not applied the discovery rule in that context.38

Finally, the Seventh Circuit thoroughly examined whether the application of either the discovery rule or the continuing tort rule would be contrary to the underlying purposes and goals of the Uniform Commercial Code (U.C.C.).  The court stated that the goals of the U.C.C. were to create a system of certainty of liability, finality, predictability, uniformity, and efficiency in commercial transactions39 In keeping with those goals, negotiable instruments are intended to facilitate the rapid flow of commerce and to foster efficiency.40 The court found that application of the continuing tort rule to the conversion of negotiable instruments would not further the goals of the U.C.C. because the result would be that plaintiffs would have a longer period to sue on a claim, thereby undermining the finality of transactions involving such negotiable instruments.41/sup>

Even though the court in Rodrigue postulated that the Illinois Supreme Court would not apply the continuing tort rule to the conversion of several negotiable instruments, its ruling did not create a split of authority for Illinois courts, because state courts are not bound by federal court decisions.42 Therefore, it was not until the First District Appellate Court’s decision in Kidney Cancer Association that there was a split of authority for Illinois courts with respect to the application of the continuing violation rule to the conversion of several negotiable instruments.

Kidney Cancer Ass’n was another case in which an employee – in this case, the executive director of Kidney Cancer Association – stole funds belonging to his employer.  Counts for negligence and conversion were filed against the bank involved in the transactions.  The bank brought a motion to dismiss pursuant to § 2-615 of the Code of Civil Procedure.43 The trial court granted the motion and dismissed the negligence count without prejudice, and dismissed the conversion count with prejudice, finding that it was barred by the statute of limitations.

The appellate court began its examination of the continuing violation issue by reviewing the relevant case law, including the cases discussed above. The court stated that while the complaint alleged several conversions of negotiable instruments, each unauthorized deposit by the plaintiff’s employee gave the plaintiff a viable right to file an action for conversion.44 The court found the fact that the conversions spanned a five-year timeframe to be irrelevant because the repetitious nature of the violations did not affect the nature or validity of the plaintiff’s action.45 Moreover, the court stated that, at least in its view, the Illinois Supreme Court has made clear that the continuing violation rule only applies when the pattern, course, or accumulation of the defendant’s actions are relevant to the cause of action.46 Ultimately, the appellate court found the reasoning of Rodrigue more persuasive than that of Field.47

Illinois judges and practitioners are left with a split of authority in the appellate court districts.  Those in the first and fifth district are bound to follow the ruling of the respective appellate districts.  However, those from each of the other districts in Illinois are left with the difficult decision of choosing between two equally authoritative precedents.  Of course, the entire issue could be settled by an Illinois Supreme Court ruling on the issue, but until then, or until more districts rule in favor of one side or the other, practitioners will argue and judges will struggle with which rule to apply.

Recovering a Defendant’s Attorney Fees Under the Consumer Fraud Act: Plaintiffs Worry Not

Despite the Illinois Supreme Court’s admonition that not every cause of action for breach of contract gives rise to a corresponding cause of action under the Consumer Fraud and Deceptive Business Practices Act (the Act)1, there is no shortage of breach of contract cases including claims for relief based on the provisions of the Act.

Originally published in The Docket, April 2007
By Mark A. Van Donselaar

186987572Despite the Illinois Supreme Court’s admonition that not every cause of action for breach of contract gives rise to a corresponding cause of action under the Consumer Fraud and Deceptive Business Practices Act (the Act)1, there is no shortage of breach of contract cases including claims for relief based on the provisions of the Act. The motivation for the prevalence of attorneys bringing claims for consumer fraud is speculative at best. Perhaps the skillful attorneys bringing such claims are consistently able to find facts supporting a cause of action based on the Act. Maybe the relatively low pleading requirements for an action based on the Act2 are appealing to attorneys who feel as though their client’s situation neatly fits within the statute’s framework. Or, quite possibly, the allure of an award of attorney’s fees as part of a judgment is simply too compelling to a plaintiff’s attorney with a complaint on the drafting table.

Until the Supreme Court’s decision in Krautsack v. Anderson, 3 the provisions of the Consumer Fraud Act regarding the availability of attorney fees to the prevailing party remained somewhat of a mystery. Section 10a(c) of the Act provides that a court may award “reasonable attorney’s fees and costs to the prevailing party.”4 The issue of when a prevailing consumer fraud plaintiff may be awarded attorney fees has been well-settled for some time.5 However, the same cannot be said about a prevailing consumer fraud defendant. To be sure, there have been appellate court rulings on the availability of attorney fees to prevailing consumer fraud defendants.6 However, the Illinois appellate circuits have been split as to what must be shown before such fees may be awarded.7 This article reviews a sampling of Illinois appellate court cases in which the award of attorney fees to a prevailing consumer fraud defendant was at issue, and examines the ruling in Krautsack v. Anderson.

Haskell v. Blumthal8 was the first reported case in which a defendant who prevailed in an action for consumer fraud sought to be reimbursed for its attorney’s fees.9 The court initially examined whether a defendant who defeated a claim brought for consumer fraud could be considered a “prevailing party.” Without case law to guide it, the court referred to an Illinois Bar Journal article that supported the theory that a defendant who successfully defeats a claim brought against him under the Act should be eligible to receive fees.10 The court also examined federal civil rights legislation, which allows reasonable attorney’s fees to the prevailing party, and found that a defendant who wins such a case is deemed a “prevailing party.”11 Based on federal precedent and the “commonsense interpretation of the phrase ‘prevailing party,’” the court found that a defendant who defeats a charge brought against him for consumer fraud is a “prevailing party” for the purposes of determining eligibility for reimbursement of attorney fees.12

Having determined that the defendant was eligible for reimbursement of its attorney fees, the court noted that the amount, if any, is within the court’s discretion.13 Accordingly, the court then discussed the criteria for whether to award attorney fees to a prevailing consumer fraud defendant.14 Without case law directly on point, the court looked to the guidelines followed by courts when determining whether to award attorney fees to a party in an ERISA lawsuit, including: “‘(1) the degree of the opposing parties’ culpability or bad faith; (2) the ability of the opposing parties to satisfy an award of fees (3) whether an award of fees against the opposing parties would deter others from acting under similar circumstances (4) whether the parties requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA; and (5) the relative merits of the parties’ position.’”15

The court found that no one guideline was decisive and that a showing of bad faith was not required to justify an award of attorney fees.16 However, the court also stated that it had difficulty envisioning a situation where it would award attorney fees to a prevailing consumer fraud defendant in the absence of bad faith on the part of the plaintiff.17 It noted federal case law supporting the proposition that, while successful plaintiffs should usually be awarded their attorney fees, successful defendants should be awarded their attorney fees only when the suit brought against them is frivolous.18

The court found the use of different standards for plaintiffs and defendants to be logical.19 The court justified its support for using different standards for plaintiffs and defendants by contending that defrauded plaintiffs would be discouraged from bringing lawsuits to recover their damages if the majority of any damages would be used to pay their attorney’s fees.20 Haskell spawned several other cases that purport to follow Haskell, but upon closer examination extended the ruling in that case. Two of these cases include Graunke v. Elmhurst Chrysler Plymouth Volv21 and Casey v. Jerry Yusim Nissan, Inc.22

The dispute in Graunke arose from the plaintiff’s purchase of an automobile from the defendant. The plaintiff alleged that the defendant led him to believe that the automobile he was purchasing was a “brand new” 1987 Chrysler New Yorker. Later, the plaintiff discovered that the automobile was actually a used 1986 New Yorker. After weighing the evidence, including the plaintiff’s own testimony and a letter written by the plaintiff referring to his “1986” New Yorker, the trial court ruled in favor of the defendant. Subsequently, the defendant filed a petition for attorney’s fees. After a hearing, the trial court denied the request for attorney fees and awarded costs of $291.90. The defendant appealed the denial of attorney fees.

The appellate court examined the Act and remanded the case to the trial court,23 holding that, in certain circumstances, a prevailing defendant is entitled to reasonable attorney fees.24 The court noted that there was nothing in the language of the Consumer Fraud Act that would limit a defendant’s recovery of fees to those cases in which the plaintiff acted in bad faith.25 The court referenced the Haskell court’s statement that it would have difficulty envisioning a circumstance in which “fees should be awarded [to] a defendant absent bad faith on part of the plaintiff.”26 The court interpreted that statement to be a “general commentary on the policy underlying attorney fee awards, rather than a pronouncement limiting fee awards to cases in which there is bad faith on the part of the plaintiff.”27

The court stated that, in its opinion, the policy considerations for awarding attorney fees to prevailing plaintiffs may not mirror those for awarding attorney fees to prevailing defendants.28 The court instructed that the legislative purpose behind permitting attorney fees to prevailing parties under the Consumer Fraud Act should be considered by trial courts.29 It found that by awarding attorney fees to prevailing parties under the Consumer Fraud Act, the court sought to further its goal of eradicating all forms of deceptive and unfair business practices.30 The award of attorney fees was necessary to further this goal because, without the possibility of being awarded reimbursement of their attorney fees, plaintiffs may be reluctant to bring an action for fear that any recovery would be consumed by attorney fees.31

In conclusion, the court restated the factors presented in Haskell as pertinent for the consideration of whether to award attorney fees and wrote that “the existence of bad faith . . . is not the only consideration, but it is an important factor, in some cases the controlling one, which should be considered by a court deciding whether to award attorney fees.”32

The importance of the bad faith factor was furthered by Casey v. Jerry Yusim Nissan, Inc.,33 which also arose out of the sale of a used car. The defendants requested more than $41,000 in attorney fees but were awarded $30,000 in fees. They appealed from that ruling.

On appeal, the court emphasized the importance of a bad-faith finding and the significance of the policy interests discussed in Graunke and Haskell.34 In fact, the court went so far as to say that “[i]n Haskell, the court found that an award of fees to a prevailing defendant depended on a finding of bad faith by the plaintiff.”35 The court then reasoned that “[c]learly, bad faith is the pivotal factor in awarding attorney fees to prevailing defendants under the Act.”36 It concluded: “Thus, trial court must first determine whether the plaintiff acted in bad faith.”37

Tracking the evolution of the bad faith factor from Haskell to Casey is quite startling. In Haskell, the court merely indicated that it had a hard time envisioning a situation where a defendant would be awarded attorney fees in the absence of a bad-faith finding on the part of the plaintiff.38 Though Haskell supported different standards for determining whether to award fees to defendants and plaintiffs,39 the court never stated that a defendant may only be awarded fees if the plaintiff acted in bad faith. Moreover, the fact that the Haskell court was unable to envision a situation where fees may be awarded to a defendant absent bad faith cannot be reasonable interpreted as an absolute bar to such an award.

In Graunke, the appellate court remanded the case because it felt that the court might have inappropriately based its ruling exclusively on whether the defendant had shown bad faith by the plaintiff.40 However, Casey incorrectly referenced Haskell and Graunke for the proposition that the award of fees to a defendant depended on a finding of bad faith by the plaintiff.41 Furthermore, Casey states that “a trial court must first determine whether the plaintiff acted in bad faith.”42 Thus, Casey at least implies that a court must find bad faith by the plaintiff before it may even examine the other factors used to determine whether to award attorney fees to a prevailing defendant.

An appellate court case that did not follow the developing trend of requiring a showing of bad faith before awarding fees to the defendant is Boeckenhauer.43 Boeckenhauer also arose from the sale of a used car. One of the defendants, the Ford Motor Co., successfully defeated the consumer fraud claim and filed a petition for attorney fees. The court denied Ford’s request for fees, relying on the Casey decision for the appropriate test for whether to award fees. On appeal, Ford argued that bad faith is not a prerequisite to an award of attorney fees to a prevailing defendant, and that different standards do not apply for prevailing plaintiffs and defendants.

The court began with an examination of the precedent established by Graunke and Casey. The court found nothing in Graunke that supported the proposition that bad faith by the plaintiff must be shown to award fees to a prevailing defendant, and it declared Casey’s reliance on Graunke for that proposition to be erroneous.44 The court also found that, in Graunke, it had rejected the notion that Haskell placed a bar on awarding attorney fees to prevailing defendants absent bad faith by the plaintiff.45 As it did in Graunke, the appellate court remanded the case to the court because it was unclear whether the court was acting under the belief that it was required to find bad faith by the plaintiff before awarding fees to the defendant.46

During the pendency of Ford’s second appeal in Boeckenhauer,47 the Illinois Supreme Court decided Krautsack,48 which established a new precedent for awarding attorney fees to prevailing consumer fraud defendants. The allegations in Krautsack arose out of a contract for a two-week safari to East Africa. In support of his claim for consumer fraud, the plaintiff alleged that the defendant knowingly misrepresented to him that existing weather conditions in Africa would not interfere with the planned safari.

The court granted the defendants’ motion for summary judgment on the consumer fraud count. Defendants then filed a petition for attorney fees under section 10a(c) of the Consumer Fraud Act. The plaintiff appealed the grant of summary judgment on the consumer fraud count, and the appellate court reversed. Because the summary judgment entered for defendants was overturned, they were no longer a prevailing party, so they could no longer maintain a petition for their fees. On remand, the case went to a bench trial, and judgment was entered for the defendants on all counts, including the count for consumer fraud. Defendants, again, sought reimbursement for their fees. The court entered an order striking the defendants’ petition for fees, and the defendant subsequently appealed that order. The appellate court upheld the trial court’s decision, and the Illinois Supreme Court granted the defendants’ appeal.

The defendants’ contention on appeal was that “an award of attorney’s fees to a prevailing defendant under section 10a(c) of the [Consumer Fraud] Act should not be conditioned upon a finding that the plaintiff acted in bad faith.”49 The court began by reviewing the well-known principles that guide the interpretation of any statute.50 The court then quoted the language of the Consumer Fraud Act allowing for attorney fees to the prevailing party and found that a prevailing defendant is a prevailing party for purposes of the Consumer Fraud Act.51

The court explained that it agreed with the defendants’ argument that nothing in section 10a(c) conditioned awarding fees to a prevailing defendant on the existence of bad faith by the plaintiff, and that it also agreed with the plaintiff’s argument that section 10a(c) does not expressly restrict or limit the court’s discretion on whether to award fees.52 Therefore, the court found that it must look beyond the language of the statute and examine its provisions in light of the entire statute, while keeping in mind the legislature’s intent and the evils it sought to remedy.53

The court reiterated its own findings from Cruz v. Northwestern Chrysler Plymouth Sales, Inc.54 that in consumer fraud cases the amount incurred by plaintiffs for attorney fees can easily out weight the amount recovered for actual damages.55 The court reasoned that plaintiffs would be reluctant to bring claims for consumer fraud violations because any potential recovery for damages could easily be consumed by attorney fees.56 Thus, the court noted that the allowance of attorney fees to prevailing plaintiffs is necessary to encourage plaintiffs who have causes of action to sue and thereby discourage unfair or fraudulent methods of business.57

The court explained that the reasons for allowing attorney fees to a prevailing defendant are different than the reasons for allowing attorney fees to a prevailing plaintiff.58 The court referenced Haskell for the proposition that the award of attorney fees to prevailing defendants was meant to deter bad-faith conduct by plaintiffs and to reimburse defendants when such bad-faith conduct did occur.59 Therefore, the court found that allowing fees to defendants only in situations where bad faith by the plaintiff is shown is consistent with the purposes of the Consumer Fraud Act.60 The court opined that without this stricter standard for the award of defendant’s attorney fees, a plaintiff with a legitimate claim could be forced to pay a defendant’s attorney fees simply because the plaintiff “lost at trial on the proofs.”61 The court stated that such a potential penalty would be deterrent to filing a consumer fraud action and would defeat the purpose of the Act.62

The court also took time to respond to an argument presented by the defendant that to only allow fees to a defendant when bad faith by the plaintiff is shown unfairly shifts the balance of fairness in consumer fraud cases to favor the plaintiff.63 The court countered that although the award of fees to plaintiffs is discretionary, not mandatory, the award of fees to a prevailing plaintiff is more likely than to a prevailing defendant.64 However, the court explained that such was the result of the remedial function of the Consumer Fraud Act, not a distortion of the statute.65 The court also noted that a prevailing plaintiff is a more worthy candidate to receive reimbursement for fees because he or she has proven the defendant’s guilt, while a successful defendant may have not proven anything more than that the plaintiff’s efforts were unsuccessful.66

Having determined that fees should be awarded to the defendants only when bad faith by the plaintiff is shown, the court went on to examine the standard that governs a bad-faith finding.67 Previous appellate court cases had ruled that Supreme Court Rule 137 provided theappropriate standard upon which to judge bad faith.68 On this issue, however, the court agreed with the defendant and held that a defendant should not be limited by Rule 137 in proving a plaintiff’s bad faith.69 Though the court found Rule 137 and its case law to be instructive, it ruled that the failure to prove bad faith under Rule 137 is not fatal to a defendant’s claim for attorney fees.

The conclusion stemming from these cases is that a plaintiff’s counsel need not worry too much about the scenario in which his or her client may be held liable for the defendant’s attorney’s fees. While the award of attorney fees to defendants is still discretionary, it seems unlikely that circuit courts will be willing to assess fees against a plaintiff who has survived the initial round of dispositive motions.