389145881_51ca090bb2_zDuring its May term, the Illinois Supreme Court heard oral arguments in Henderson Square Condominium Association v. LAB Townhomes, a case posing several related questions about the scope of a developer’s tort duties in connection with a several-years-old building. Our detailed summary of the facts and lower court holdings in Henderson Square is here.

The plaintiffs sued various developers and individuals involved in a condominium development, alleging that the defendant had entered into a contract to develop the mixed use project in the City of Chicago. Plaintiffs allege that defendants began to market individual units in 1996, selling units through a form sales contract. 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 issues would be very difficult, if not impossible, to remedy without substantial reconstruction of the units. A contractor confirmed the extent of the alleged 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 moved to dismiss counts I-III as time-barred. The trial court agreed and dismissed those claims. The plaintiff filed an amended complaint, and the trial court dismissed on defendant’s motion. The Appelate Court reversed.

Counsel for the developer began the argument by telling the Court that the case was about a stale construction defect claim gussied up to survive the ten year construction defects statute of repose. The Appellate Court relied upon the exception for fraudulent concealment of a cause of action to justify resuscitating the plaintiffs’ claim fifteen years after construction was completed. But fraudulent concealment must be specifically pled, counsel argued – plaintiffs must allege an affirmative act which was intended to and did in fact prevent the plaintiff from finding its injuries and filing suit. But here, counsel argued, plaintiffs didn’t even claim that defendants had done anything to prevent or lull the plaintiffs from filing timely. The Appellate Court appeared to have suggested that where the plaintiff pleads a fiduciary relationship, there is no need for pleading an affirmative act. Justice Thomas asked whether counts 4 and 5 were construction related or not, such that the construction statute of repose would apply. Counsel answered that whether the Section 13-214 statute of limitation applied was not before the Court – the plaintiff had not argued below that the case wasn’t subject to the construction statute of limitations. Justice Thomas suggested that there was authority holding that the nature of the liability dictates which limitation period applies, so it was important to know what the Appellate Court had found. Counsel answered that the exception should be strictly construed, requiring affirmative facts or a relationship that in fact operated to prevent discovery. Instead, plaintiffs had focused in part upon the preconstruction brochure. But, counsel argued, given the disclaimers required by law, it was difficult to see how those representations could be false. Justice Thomas suggested that counsel was arguing that plaintiffs knew about their cause of action when the water leaks appeared, but that the insulation issues had nothing to do with the leaks. Was there any inconsistency there? Counsel said no – the infiltrating water was sufficient to trigger inquiry notice, but the insulation wasn’t intended to prevent water leakage. The insulation was on the third floor, while the water leaks were in garden basement units. Counsel noted that the second misrepresentation relied upon by plaintiff was the reserve budget, but it was impossible to see how that could either conceal the cause of action or talk anyone out of timely filing. The Chief Justice asked whether a fiduciary could ignore future problems on the grounds that they wouldn’t manifest until after the fiduciary relationship ended. Counsel responded that whether or not there was an appreciable risk didn’t make the matter a material misrepresentation. Justice Thomas asked whether those were questions of fact like the statements that allegedly lulled the plaintiffs into not pursuing their claims. Counsel answered that if plaintiffs were going to invoke the fiduciary relationship, they must allege what happened that lulled them into doing nothing.

Counsel for the homeowners followed. Justice Theis read the City’s Condominium Ordinance and asked whether the claim was about the construction, or was fraud/misrepresentation. Counsel answered that the claim went to the marketing of the units – the defendant had claimed that the building had a quality it didn’t have. Justice Theis asked if the claim was subject to the construction statutes of limitation and repose. Counsel responded that the plaintiffs have always argued that the breach of fiduciary duty claims are subject to the five-year statute. The claims weren’t construction-related, but they weren’t for fraud either. Counsel argued that the plaintiffs had always claimed that the five-year statute applied, but both courts had held that the claims were construction related. The claim wasn’t just about cutting corners or omitting insulation, counsel argued. Justice Thomas asked if there was any allegation in the complaint of when the plaintiffs knew of the water leak. Counsel answered that plaintiffs had learned of the leaks in later 2007 or early 2008. But insulation was only one problem with the building. Justice Thomas asked counsel to explain the link between the insulation and the source of the water. Counsel answered that the homeowners had brought in a contractor after the water leaks appeared, who had ultimately found the problems with the missing insulation. Counsel argued that the plaintiffs had alleged a whole stream of deceptive conduct.   Although the defendant argued that it was unreasonable to rely on misrepresentations in the owners’ owners’ packet, the whole point was that plaintiffs should have relied on their fiduciary. There was no reason to investigate between the water leaks given the defendant’s reputation, counsel argued. The homeowners had discovered the leaks in 2007-2008, but didn’t know about the further problems until they hired a contractor in 2009. They didn’t know the full dimensions of the problem until 2011. Justice Burke said that the Appellate Court had apparently believed that any false statement was actionable under the Municipal Code. Counsel said that the issue would have to be decided on a case-by-case basis. Amici had suggested that puffery would be covered by the Appellate Court’s standard, but counsel suggested that such statements would always be protected because a statement had to be false as a matter of fact. Justice Burke asked whether any false statement was sufficient, or it had to be a material statement. Counsel answered that any false statement was sufficient.

Counsel for the developer concluded in rebuttal, arguing that affirmance would amount to a substantial policy change, increasing consumers’ legal and medical costs. The plaintiffs argued that mere deceptive conduct was sufficient, but they didn’t come close to the Supreme Court’s standard for fraudulent concealment, counsel argued. That required facts sufficient to operate to prevent the plaintiff from bringing the claim. The unit owners had been complaining for years about water infiltration, and yet the homeowners hadn’t sued. Justice Kilbride asked when the problems first became widespread, and counsel answered that he wasn’t sure they ever had – the leaks didn’t go beyond the four garden units. Justice Kilbride asked if the report following the 2007/2008 leakage issues indicated widespread problems. No, counsel answered. Justice Theis asked counsel to address the Supreme Court’s 2014 decision in Gillespie Community Unit School District No. 7 v. Wight & Co.. Counsel answered that that if the fraudulent concealment exception to the statute of limitations applies, then Gillespie would dictate that the five-year statute of limitations applies. Justice Theis asked whether Gillespie was helpful in determining whether the claims were construction related. Counsel responded that he wasn’t sure it was – Gillespie had involved a school. Counsel concluded by arguing that the planning phase of a project was clearly subject to the construction statute of limitations. A developer put together a statement and set a budget – and all that was planning within the construction statute. Justice Thomas asked which statute applied to the City Ordinance. Counsel answered that if the construction statute of limitations doesn’t apply, then the residual statute would. Counsel concluded by arguing that even if the plaintiffs had no duty to investigate before the water leaks occurred, they certainly had a duty to do so afterwards.

We expect Henderson Square to be decided in four to six months.

Image courtesy of Flickr by John Zacherle (no changes).