20207283626_406fd4834d_zIn early November, a sharply divided Illinois Supreme Court cleared the way for claims against the developer and contractor involved in a now 19-year-old condominium development, narrowly affirming the Appellate Court decision in Henderson Square Condominium Association v. LAB Townhomes, LLC. Our detailed summary of the underlying facts and lower court opinions in Henderson Square is here. Our report on the oral argument is here.

The development at issue in Henderson Square was the result of a contract between developers and the City of Chicago to build a mixed use project, including retail space, a parking structure, loft condominiums and townhouses. Plaintiffs allege that the defendants began to market individual units in 1996, and that the units were sold through a form contract representing that they had been built substantially in accordance with the plans and specifications. After the owners began to occupy the units, certain units began to show water damage. A consultant retained by the Board concluded that the workmanship in several areas of the project was very poor, and that fixing the water problems would pretty much require reconstruction of the units. A contractor then confirmed that the defects could not have been found without extensive testing and partial demolition of the units.

The plaintiffs sued for breach of the implied warranty of habitability, fraud, negligence, breach of Chicago Municipal Code Section 13-72-030 and breach of fiduciary duty. The defendants first successfully moved to dismiss the first three counts as time-barred. The defendants later filed a second motion to dismiss, alleging that the remaining two claims were time-barred, and the fourth claim, for breach of the Municipal Code, failed to state a claim. The Appellate Court reversed, reinstating all five claims.

In an opinion by Justice Thomas for a four-three majority, the Supreme Court affirmed. The case turned on the intersection of two parts of section 13-214 of the Code of Civil Procedure, which provides both a four year statute of limitations (735 ILCS 5/13-214(a)) and a ten year statute of repose (735 ILCS 5/13-214(b).) The plaintiffs argued that their principal claims were timely because the nature of the construction defects – requiring substantial destruction to find – amounted to fraudulent concealment.

The defendants argued that plaintiffs could only prove fraudulent concealment by relying upon acts after the allegedly tortious conduct. The Supreme Court disagreed, holding that the exact timing of the relevant conduct doesn’t necessarily matter, so long as it operates to keep the plaintiff from finding his or her cause of action. The Court held that the plaintiffs’ allegations – that the defendants had deliberately cut corners on the project in such a way as to be difficult to detect – were sufficient to raise an issue of fraudulent concealment, making the plaintiffs’ claims timely.

The Court held that the plaintiffs’ fiduciary duty claim survived as well. The plaintiffs alleged that during the time the individual defendants had been on the project’s board of managers, they had failed to provide a sufficient reserve for the expensive repairs they knew were likely to be needed. All that’s needed to bring a fiduciary claim within the statute of limitations, according to the Court, is that facts necessary to indicate that the fraud was kept concealed through confidence placed in the fiduciary be pled in the complaint. Although the Court noted that the plaintiffs’ complaint was “inartfully drafted” in this respect, it was sufficient to bring the case within the rule.

In the alternative, the defendants argued that the amended complaint was time-barred under the default five-year statute of limitations set forth at 735 ILCS 5/13-205, which applies to fraud-based and fraudulently concealed claims. The defendants emphasized that the plaintiffs had admitted finding water leakage in the garden units of the development as early as the winter of 2007/2008. But the Court pointed out that the discovery rule requires that to start the statute of limitations clock running, the plaintiff must become aware both of the injury and that it was wrongfully caused. Because of the nature of the alleged construction defects, the Court found that there was a question of fact whether the plaintiffs had reasonably not known of the allegedly tortious conduct within the five year limit.

The Court then turned to the plaintiffs’ claim for violation of Section 13-72-030 of the Chicago Municipal Code, which prohibits sale of a condominium unit by “employing any statement or pictorial representation which is false.” The Court rejected the trial court’s view that the statute was analogous to garden-variety fraud, pointing out that since it related to sale of condominium units – which may occur before construction is complete – quite often, statements about future intentions might be involved. Besides, the Court noted, there is a well-recognized exception to the general rule that only statements of present fact can form the foundation of a fraud claim when the misrepresentations at issue are part of the scheme allegedly employed to accomplish the fraud. The Court concluded by rejecting the defendant’s claim that plaintiff had no private right of action, pointing out that both the amended and preamendment version of the Code section expressly confers a private right of action.

Finally, the Court turned to the defendants’ argument that plaintiffs’ fiduciary duty claim failed to overcome the business judgment rule. The Court rejected the argument, pointing to the plaintiffs’ allegations that the defendants had acted in bad faith, knowing of the allegedly poor construction.

Justice Burke dissented, joined by Justices Freeman and Karmeier. The dissenters argued that many of the statements in the building brochure which the plaintiffs focused on for their fraud claim were non-actionable puffing, including that the developers were committed to “quality construction and detail,” “quality buildings” and “successful developments.” The brochure statement about a certain type and quality of insulation was not puffing, the dissenters acknowledged, but with respect to that statement, the plaintiffs could not prove detrimental reliance. Nor could the alleged deficiencies in the reserve fund form the basis for a finding of fraudulent concealment, the dissenters concluded, since there was no allegation that any resident was even aware of the amount of the fund, let alone that the allocation had prevented him or her from discovering the construction problems. Turning to the Chicago Municipal Code, the dissenters argued that the majority’s holding amounted to saying that mere puffing was prohibited. That could not be right, the dissenters concluded, since puffery cannot be objectively proven right or wrong.

Image courtesy of Flickr by Jeffrey Zeldman (no changes).