In the closing days of its November term, the Illinois Supreme Court agreed to review a decision from Division 5 of the First District with potentially significant implications for developers: Henderson Square Condominium Association v. LAB Townhomes. Henderson Square poses several related questions about the marketing of condominium units and the breadth of a developer’s duties in the time between the units going on the market and the developer finally turning over control to an elected board of homeowners.

Henderson Square arose from a dispute over a new condominium development in Chicago. The plaintiffs sued various developers and certain individuals involved in the project. The complaint alleged that the defendant development companies entered into a contract with the City of Chicago to develop a mixed use project, including retail space, a parking structure, loft condominiums and townhouses. Prior to the completion of the project, a condominium association was established for the property pursuant to the Condominium Property Act. The individual defendants served as the initial managers of the project, and eventually turned over control to the first elected Board in 1996.

Plaintiffs claim that defendants began to market individual units in 1996, representing that the units would be habitable and free from defects. Plaintiffs further claimed that the defendant development companies sold the units through a form sales contract promising that the units would be constructed substantially in accordance with the plans and specifications. After the owners began to occupy the units, certain units began to experience water damage. The Board retained a restoration consultant to investigate. The consultant concluded that the workmanship in several areas of the project was very poor, and that the water problems would be very difficult, if not impossible, to remedy without substantial reconstruction of the units. A contractor hired to solve the problem confirmed the extent of the defects, as well as concluding that the defects couldn’t have been discovered without extensive testing and partial demolition of the units.

The plaintiffs sued for (1) breach of the implied warranty of habitability, (2) fraud, (3) negligence, (4) breach of Chicago Municipal Code Section 13-72-030, and (5) breach of fiduciary duty. The defendants filed a motion to dismiss counts I-III, arguing that the claims for breach of the implied warranty, fraud and negligence were time-barred. The trial court agreed and dismissed those claims with prejudice, also granting the plaintiffs leave to amend their remaining claims. The plaintiffs filed an amended complaint, re-pleading Counts I through III to preserve them for appeal, while adding additional facts with respect to Counts IV and V. Defendants filed a second motion to dismiss, arguing that Counts IV and V were both time-barred, and that Count IV – for breach of the Municipal Code – failed to state a claim. The trial court once again dismissed, holding that both counts were time-barred, and neither stated a claim.

The Appellate Court reversed.

The defendants argued that Counts IV and V were time-barred pursuant to Section 13-214 of the Code of Civil Procedure, 735 ILCS 5/13-214, which provides statutes of limitation and repose for real estate construction claims. The Appellate Court agreed, rejecting the plaintiffs’ argument that defendant’s liability was based not upon construction, but rather on breach of the duty to provide accurate information about the project. However, the Court further held that the fraud exception to the statutes applied, pursuant to which the statutes of limitation and repose do not apply to causes of action “arising out of fraudulent misrepresentations or to fraudulent concealment of causes of action.” 735 ILCS 5/13-214(e). The Court found that a dispute over defendants’ representations in marketing materials about insulation used in the project, combined with the defendants’ allegedly inadequate funding of reserves during the period they controlled the project, collectively amounted to a triable issue of fact regarding fraud.

The Court then turned to the question of whether plaintiffs had adequately stated causes of action under Counts IV and V. Count IV alleged violations of the Municipal Code through the making of allegedly false statements to prospective buyers regarding the project. The Court first rejected defendants’ claim that the Code did not provide a cause of action for damages. The Court held that the plaintiffs had adequately stated a claim, rejecting the trial court’s conclusion that the Code only covers statements about preexisting facts. The Court reversed with respect to Count V, breach of fiduciary duty, as well, rejecting the trial court’s conclusion that the defendants had no duty to adequately fund reserves during the period they controlled the board. Instead, the Court held that defendants had a duty to fund reserves sufficient to pay for all reasonably foreseeable repairs as of the time they turned over control. The Court rejected defendants’ argument that their duty to fund reserves was limited to the extent to which they still owned unsold units.

Justice Palmer specially concurred, emphasizing that it was only the broad language of the Municipal Code – which merely requires a false statement, rather than a false statement of fact – which led to the Court’s holding that plaintiffs had adequately pled a violation of the Municipal Code.

Image courtesy of Flickr by Maarten Heerlien (no changes).