The Appellate Strategist

Insights on appellate issues, trial consultations, and evaluating appeals

Argument Report: Ex Post, Ex Ante and the Right To Farm

By Kirk Jenkins on Posted in Illinois

Our reports on the oral arguments of the Illinois Supreme Court’s September term continue with Toftoy v. Rosenwinkel.

Toftoy is an interesting case because it presents a textbook example of a clash between two classic forms of legal analysis. Professor Ward Farnsworth discusses the distinction at length in his classic book The Legal Analyst: the conflict between ex post and ex ante reasoning.

As Professor Farnsworth explains, ex post reasoning looks backward, asking what remedy is appropriate in connection with a completed incident. Ex ante reasoning – a form of analysis lawyers have in common with economists – analyzes what effects will result moving forward from any remedy proposed for the incident. The classic conflict between ex post and ex ante — again, borrowing Professor Farnsworth’s examples — is whether or not to pay ransom to a hostage taker. Ex post reasoning might argue that a hostage taker should be paid ransom to save the victim’s life; ex ante reasoning rejects paying ransom because it will encourage future hostage takers.

Which brings us to Toftoy and Illinois’ "Right to Farm Law" – the Farm Nuisance Act, 740 ILCS 70/1. Our summary of the facts and holding below is here. The statute provides that no farm can become a private or public nuisance "because of any changed conditions in the surrounding area" so long as the farm has been in operation for a year.

Defendants bought farmland in a rural area. Across the street was a large plot containing a farm house; a tenant lived there when defendants took possession of their plot, but by the time they started a cattle operation a year later, the farm house was empty, and so it remained for years after. In 1997, plaintiffs demolished the old farmhouse; seven years later, the plaintiffs completed a new house on what was by then a small subdivided plot and moved in. Plaintiffs sued the defendants in 2007, alleging that their cattle operation was a nuisance because it was causing massive fly infestations.

Ex post versus ex ante. The plaintiffs tell a compelling story of the disruptions to their lives caused by the flies. Ex post, one might think that some remedy would be appropriate. But the argument ex ante is the same argument which has compelled many states around the country to enact Right to Farm laws in the first place: when new residential areas impinge on farm land, allowing the residents to sue the farmers in nuisance at minimum discourages investment in farming, and can wind up driving farmers out of business entirely.

The defendants moved for summary judgment, arguing that the Farm Nuisance Suit barred the suit. The trial court denied the motion, entered a declaratory judgment for plaintiffs, and the Appellate Court affirmed.

Counsel for the cattle farmers led off the arguments. Justice Thomas asked whether the case hinged on how broadly the Court interpreted the statute. Counsel responded that the broad interpretation was correct, but the defendants should prevail under either interpretation. Justice Karmeier asked whether it made a difference that there was a residence across the street when the cattle ranch began operations — albeit a vacant one — but counsel responded that plaintiffs were not using the property as a residence when the cattle operation began. Justice Garman asked whether the changed condition for purposes of the statute was the change in ownership, or the demolishing of the old house, or both. Counsel responded that both events amounted to a changed condition. Justice Burke asked whether the result would have been different if the former farmhouse on the property had been remodeled rather than torn down. Counsel responded that there had been no use of the property for more than a year at the time the defendants began their operation. Counsel asked the Court to remand for application of the Farm Nuisance Act and the assessment of statutory fees and costs.

Counsel for the plaintiffs pointed out that the property across the street had contained a farmhouse for nearly a century, and was still a farmhouse today. Justice Thomas posed a hypothetical: what if the plaintiffs had lived in the property for one year a century ago, and then the property had been left vacant. If the defendants began a cattle operation and the plaintiffs subsequently returned, would that be a changed condition? Counsel responded that a causal connection was necessary between the changed condition and the nuisance; if the property merely progressed from one house to another, that prerequisite was not satisfied. Counsel argued that if occupancy alone was a changed condition, owners would have to worry about losing a tenant. Justice Theis asked whether the change in title or the subdivision of the property factored in; counsel responded that the property had always been a residence. Justice Garman asked whether it would make a difference if the house across the street was vacant, and counsel responded "no." Justice Thomas stated that he was having trouble with the occupancy issue. He pointed out that no one had been in the house when defendants began the cattle operation — why wasn’t the change in condition for purposes of the statute the fact that the house was now occupied? Counsel answered that the standard proposed was a slippery slope, suggesting a hypothetical of a strip mall which became vacant for a couple of years in a recession, and then couldn’t be used again because a cattle operation began across from it.

Justice Karmeier asked whether somebody who wants to start a cattle operation was required to research the property across the street to determine whether it had ever been a private residence, or else face the risk of a nuisance suit. Counsel responded that no research was necessary, since there was somebody living in the home when defendants took possession. Justice Garman wondered whether it would make any difference if the house was dilapidated or in good condition. Counsel insisted that his clients the plaintiffs were farmers as well; the property was their family farm, and the residence was a farm house. Justice Thomas suggested that plaintiffs seemed to be arguing that "condition" meant "use" for purposes of the statute; if that was so, since the legislature didn’t actually say "use," shouldn’t that incline the Court to a broad construction of the statute? Counsel responded that the statute should be interpreted based upon the statutory command that the nuisance occurred "because" of the changed condition.

Counsel for the defendants ended his rebuttal with another appeal to an ex ante result, arguing that an affirmance would commit the farming industry in Illinois to long-term historical uses of the property surrounding their farm properties.

Argument Report: When Is the Property Valued in a Divorce Settlement?

By Kirk Jenkins on Posted in Illinois

Our reports on the oral arguments of the Illinois Supreme Court’s September term continue with Mathis v. Mathis. Mathis presents a question which frequently arises in divorce proceedings: when a significant period passes between the divorce and the property settlement, what is the date on which the property is valued? For the first time in the term, the Court’s questioning seemed fairly evenly split between the parties, leaving the result very much up in the air.

Click here for the underlying facts and lower court holdings in Mathis. The husband filed for divorce in 2000, and the judgment of dissolution was entered a few months later. The hearing on the property issues began in April 2004, but years of delays followed. Ultimately, the court set a valuation date of December 31, 2010 – nearly ten years after the judgment of dissolution. On the husband’s motion, the trial court certified a question for interlocutory appeal: when there is a lengthy delay between the judgment of dissolution and the hearing on ancillary issues, what is the appropriate property valuation date? The question turns on the meaning of Section 503(f) of the Illinois Marriage and Dissolution of Marriage Act, which provides that the valuation date is "the date of trial" or "as close to the date of trial as practicable."

Counsel for the petitioner pointed out that before the current version of Section 503(f) was adopted, settled law held that the valuation date was the date of the dissolution judgment. She argued that the current version of the statute was both patently and latently ambiguous, and the Court should resolve the issue by construing the statute identically to its predecessor. Justice Thomas noted that the statute speaks only to property issues and not to divorce grounds, and wondered whether that made it more likely that the "date of trial" referred to a trial on ancillary matters. Counsel pointed out that the statute referred to four different sorts of proceedings, involving multiple different trial dates, leaving the statute as a whole ambiguous. Justice Garman asked how the petitioner’s proposed rule would work if the value of a business decreased between the dissolution and the property settlement, if the valuation date was the date of the dissolution. Counsel for the petitioner responded that the party owning the business would have to either make up the difference or prove the loss of value was not his or her fault.

Counsel for the respondent echoed Justice Thomas’ question, arguing that since Section 503(f) appeared in a section entirely relating to property, the logical interpretation was that the statute’s reference to the date of trial meant the property hearing. Justice Theis asked whether, if the Court chose the date of dissolution for the date on which property was valued, that might encourage parties to expedite the property settlement and get on with their lives, in contrast to the long-running dispute in this case. Counsel responded that such a rule can cause unjust results in some cases, and there are tools in the statute for courts to deal with gamesmanship. Justice Karmeier commented that the case seemed to come down to a policy question: whether the Court should take into account what might encourage early resolution of property issues, as opposed to a rule which might encourage certainty. Justice Theis once again noted that there seemed to have been no urgency on anyone’s part to resolve the property issues and move on. Counsel responded by describing the discovery and evidentiary disputes which had helped extend the dispute for so many years.

Argument Report: When Can a Foreclosure Be Appealed?

By Kirk Jenkins on Posted in Illinois

Our reports on the oral arguments of the Illinois Supreme Court’s September term continue with EMC Mortgage Corp. v. Kemp. Kemp presents the question of when a home foreclosure may be appealed.

The facts and lower court opinions in Kemp are described in detail here. Based upon the Court’s questions, it seems reasonably likely that the Court will affirm the Appellate Court and require the plaintiff to pursue her objections to the foreclosure after the order confirming the sale is entered.

Plaintiff filed its foreclosure complaint six years ago. The defendant responded by denying the plaintiff’s standing, first in an answer, and later in a counterclaim. Finally, nearly three years after the action was filed, the trial court entered a judgment of foreclosure. After reconsideration was denied, the defendant filed for bankruptcy. Over a year after the judgment was entered, the defendant mounted a new attack on the sale, filing a motion under Section 2-1401 of the Code of Civil Procedure alleging that the plaintiff was trying to foreclose a mortgage it didn’t own at the time of filing. The trial court refused to overturn the sale, but authorized an interlocutory appeal under Supreme Court Rule 304. The defendant moved for reconsideration, the trial court denied the motion, but once again, the court included Rule 304 language in its order.

Section 2-1401 petitions lie only to challenge final orders. Rule 304 language isn’t a magic wand of appealability for purely interlocutory orders; it confers appellate jurisdiction over an order which finally disposes of less than all claims, or less than all parties. So the question in Kemp was — was there a final order under all this civil procedure? If not, none of it mattered.

Counsel for the defendant began his argument by emphasizing the importance and novelty of the underlying issues, should the Court find appealability. Justice Garman asked counsel whether the issue of standing can be forfeited; counsel responded that the defendant was arguing that the order of foreclosure was void, meaning that it could be challenged at any time. Justice Theis pointed out that defendant had filed a Section 2-1401 petition, so where was the final order? Counsel responded that Section 2-1401 petitions were also proper to attack void orders, and pointed out that the trial court had expressly agreed to add Rule 304 language to the order of foreclosure. Justice Theis noted that while Rule 304(b) expressly authorizes an appeal from a true Section 2-1401 petition, the trial court had authorized Rule 304(a) interlocutory appeal language. Counsel responded that this was the dilemma; it was often too late to present meritorious defenses if a defendant awaited an order confirming the sale. In response to a follow-up question from Justice Theis as to whether the court could have modified the order of foreclosure, counsel argued that once defendant’s motion to reconsider was denied, the order of foreclosure became final. At that point, given the Section 2-1401 petition, appellate jurisdiction existed.

Justice Freeman asked what would prevent defendant from appealing after entry of the final order confirming the sale; counsel cited to judicial economy, again arguing that such final orders were often too late to challenge foreclosures. Justice Thomas asked how lack of standing could make an order void if standing could be waived, and counsel pointed out that the defendant had asserted lack of standing from start to finish of the litigation.

Justice Theis asked counsel for the plaintiff how it could be true that there were cases holding that a judgment of foreclosure can be appealed if Rule 304(a) language is included in the judgment; counsel responded that occasionally, there are foreclosures involving multiple parties or multiple claims which could become appealable with 304(a) language. Chief Justice Kilbride asked whether foreclosure and the confirmation of sale involve separate judgments, but counsel responded that he had never seen the final order called a judgment. Justice Theis asked whether counsel had ever seen Rule 304 language added to a judgment of foreclosure; counsel answered that in Cook County, such language was very difficult to obtain in foreclosures. Following up on a question to the defendant by Justice Freeman, counsel concluded by arguing that the plaintiff had established its standing to sue from the outset of the suit by attaching a copy of the underlying promissory note with a blank endorsement. Such an endorsement turns the note into bearer paper under the U.C.C., meaning that the plaintiff had standing to enforce the note, even if it didn’t technically own the note.

 

Argument Report: Taxpayer Standing to Challenge Education Financing?

By Kirk Jenkins on Posted in Illinois

Our reports on the oral arguments of the Illinois Supreme Court’s September term continue with Carr v. Koch. In Carr, the taxpayer plaintiffs are challenging Circuit Court and Appellate Court decisions that they lacked standing to challenge the state’s education funding statute; but based on the Court’s questioning, it appears unlikely that their suit will be revived.

Click here for our summary of the facts and lower court ruling in Carr. Plaintiffs are two taxpayers, one in a northern Illinois school district, one in a southern district. Plaintiffs allege that the state’s financing system effectively requires school districts with lower property values to tax their property owners more heavily than other districts with higher property values do. As we noted in our argument preview, the plaintiffs faced two problems: the Supreme Court had earlier upheld the very same statute in Edgar, and the state authorities — the defendants in the action — weren’t the ones who set the plaintiffs’ tax rates. The trial court dismissed, and the Appellate Court affirmed.

Although the Appellate Court had denied standing on the grounds that none of the state’s actions or omissions had caused plaintiffs’ tax rates, counsel for the plaintiffs disagreed before the Supreme Court, arguing that the state funding system was a but-for cause of the local taxing authorities’ tax rate decisions. Justice Thomas asked how counsel defined plaintiffs’ injury, and counsel responded that plaintiffs were taxed more heavily to reach the "Foundation Level" of education funding. Justice Thomas followed up, asking counsel whether his position was that this injury was a direct result of the statute, or didn’t have to be in order to have standing. Counsel answered that the statute was a direct cause of the injury. Justice Burke asked counsel whether a penalty was imposed if a particular school district failed to meet the Foundation Level of funding; counsel argued that the threat of sanctions from the state was inherently coercive. Justice Thomas asked whether state funding was tied directly to state learning standards. When counsel answered "no," Justice Thomas asked how counsel addressed the argument that plaintiffs’ injury was too attenuated to confer standing. Counsel responded that the injury was unequal taxing treatment.

Counsel for the Attorney General faced relatively few questions from the Court. Justice Karmeier asked whether a school district would face a penalty if it set an extremely low tax rate. Counsel responded that the State assumed a 3% tax rate, but took no action if a local authority failed to match that rate. Counsel for the State challenged the plaintiffs’ claim of injury, pointing out that the State could only take over a local school district once it had ranked below statewide learning standards for eight straight years. In the meantime, the state took various steps which were to the advantage of both students and taxpayers, casting doubt on a claim of injury.

The Court had no further questions during plaintiffs’ rebuttal. Counsel responded to the Attorney General’s argument by insisting that the degree to which local control had been superseded — the central question in determining whether Edgar barred the plaintiffs’ claim — was an issue of fact for the jury to determine.

Argument Report: Immunity for Court-Appointed Psychologists?

By Kirk Jenkins on Posted in Illinois

Our reports on the oral arguments of the Illinois Supreme Court’s September term continue with Cooney v. Rossiter, a case about the breadth of immunity for court-appointed psychologists in child custody cases. Based on the questions at argument, the Court appeared to be searching for alternatives short of limiting the scope of such experts’ immunity.

The facts and lower court ruling in Cooney are described in detail in our argument preview. In 2001, plaintiff’s ex-husband filed for a change of custody. The psychological evaluator appointed to opine on the best interests of the children concluded that plaintiff ex-wife and her parents (the co-plaintiffs) suffered from Munchausen’s by Proxy Syndrome, and concluded that their treatment of one child amounted to child abuse. After custody was granted to plaintiff’s ex-husband, plaintiffs filed a federal class action against the defendant. The action was dismissed and the dismissal affirmed, so the plaintiffs sued in state court.  The state court dismissed based on absolute immunity and res judicata, and the Appellate Court affirmed.

Counsel for the plaintiffs argued that in order to deter deliberate misconduct by psychological evaluators, the proper rule was qualified immunity for investigation and out-of-court evaluation, and absolute immunity for in-court testimony. Justice Karmeier asked whether it was possible to raise issues such as the evaluator’s unfairness and bias prior to his or her appointment. Counsel responded that his client did not know the facts until it was too late. Justice Thomas asked whether plaintiffs’ charges were the subject of cross-examination at trial, and counsel responded that the trial judge relied solely on defendant’s report. Justice Thomas pressed his question, asking whether requiring parties to address issues of bias and misconduct in the custody litigation would make it possible to preserve absolute immunity. Counsel answered again that defendant had not been present on the day of the hearing, and the plaintiff had received his report only that day.

Counsel argued that court-appointed evaluators would still have adequate protection if qualified immunity was instituted — a plaintiff would still be required to plead intentional misconduct or fraud, and the trial judge would act as the gatekeeper, screening out frivolous complaints. Justice Burke asked whether plaintiff had her own expert, pointing out that there must have been adequate time between defendant’s appointment and his report; counsel responded that there was no reason to anticipate anything negative in defendant’s report.

During appellee’s argument, Justice Karmeier asked whether it would make any difference to the Court’s analysis that defendant’s opinion came in via a written report rather than live testimony and cross examination. Counsel answered no; cross examination can be requested, and a party may insist on his or her objection if it is denied. Justice Freeman pointed out that none of that helps if the judge denies cross-examination, but counsel responded that this could be the subject of further litigation, post-trial motions, or an appeal. After Justice Burke noted that the trial judge – like the plaintiff — had only seen the defendant’s report the morning of the hearing, Justice Freeman continued to press, asking counsel whether the trial judge’s refusal to allow live testimony in the custody action could rise to the level of an abuse of discretion. Justice Thomas asked counsel to address the plaintiffs’ argument that qualified immunity was sufficient protection; counsel responded by pointing out that qualified immunity doesn’t bar suits at the outset as absolute immunity does, and may not even prevent a jury trial.

The Court’s search for alternative resolutions continued in plaintiffs’ rebuttal argument. Justice Karmeier asked whether plaintiffs’ concern about bad faith evaluators couldn’t be addressed by discouraging trial judges from admitting written reports in preference to live testimony.  Justice Thomas speculated that a professional licensure action might be an available remedy against a bad-faith evaluation.

Join us back here later today for our report on the argument in Carr v. Koch.

Argument Report: Subject Matter Waiver for Business Negotiations?

By Kirk Jenkins on Posted in Illinois

A casual viewer might be forgiven after watching the oral argument last week in Center Partners, Ltd. v. Growth Head GP, LLC for being uncertain exactly what the law of Illinois was regarding the applicability of subject matter waiver to disclosures of attorney-client communications outside litigation. In a nearly hour-long debate, opposing counsel presented diametrically opposed visions. According to plaintiffs, the matter was simple: you either want secrecy or you don’t, and applying subject matter waiver outside litigation was hardly a big deal. Defendants, backed by a number of high-powered amici, argued that plaintiffs were seeking an unprecedented and dangerous extension of waiver which would divorce the doctrine from its rationale. Although predicting what an appellate court is likely to do from its questions is always a dicey business, judging from several Justices’ questions, the Court may be preparing to side with the plaintiffs.

Click here for our preview of the argument in Center Partners. The defendants bought the assets of a company which (through a series of corporate relationships too complex to review here) owned a number of shopping centers. The same day, they entered into a side deal dividing up control of the target’s assets among themselves. Everything was going fine until the plaintiffs – limited partners in the shopping center company – sued them for breach of fiduciary and contractual duties.

The problem was that the three defendants had shared attorney-client communications among themselves during the negotiations for the asset purchase. First, plaintiffs filed a motion to compel production of all of the shared communications: granted. But then, plaintiffs filed a second motion, seeking all communications regarding the same subject as the shared communications, arguing that the disclosures had worked a general subject matter waiver. The second motion was granted too, and following a “friendly contempt” order (to make the dispute appealable), the Appellate Court affirmed.

So: does subject matter waiver apply outside the context of litigation? And if so, how broad is the waiver?

The defendants argued that the Appellate Court had erred in both respects: subject matter waiver shouldn’t have been applied at all, and even if it had, the Appellate Court had applied far too broad a waiver. In response to a question from Justice Burke, counsel stated that no litigation had been ongoing at the time of the disclosures, and none had been anticipated (a view counsel for the plaintiffs disputed later). When counsel argued that waivers are applied in order to prevent the privilege from interfering with a court’s truth-seeking function, Justice Garman wondered whether that rationale might equally support a broad application of the waiver rule.

Justice Thomas asked counsel whether, even if parties are permitted to share attorney-client communications with some people while preserving the privilege, at some point the dissemination of a communication has simply gone too far? Counsel acknowledged that although the common interest privilege had not been claimed, the scope of the waiver should have been limited to the shared communications themselves. Justice Karmeier asked counsel whether it mattered for his position why attorney-client communications had been shared, and counsel responded that it did not.

During plaintiffs’ argument, several Justices continued to wonder whether the basis on which subject matter waiver rested could be logically limited to litigation only. Historically, general waivers have been imposed because otherwise a party can use protected communications as a sword, letting out only what the party wants to, and a shield – hiding additional communications which might give context to, or even contradict, the disclosed material. Justice Theis asked whether there was some suggestion in the record below of similarly misleading partial disclosures. Justice Thomas echoed the point, arguing that absent a subject matter waiver, a party would be free to selectively disclose what it chose in a negotiation, knowing that it would be available for later litigation, while keeping the rest of the story protected. In response to a question from Justice Garman, counsel argued that defendants were relying on attorney advice in the underlying dispute. Justice Burke asked why the waiver had to sweep so broadly, but counsel disputed the assertion of defendants’ counsel that the defendants had not expected litigation at the time of the disclosures.

In rebuttal, counsel for the defendants denied that defendants were relying on attorney advice below. In response to Justice Thomas’ concern that refusing to apply subject matter waiver to business negotiations might lead to an unfair partial waiver, counsel argued that the initial disclosure itself should be excluded on hearsay and relevance grounds, making a general waiver to place the initial disclosure in context unnecessary.

We expect Center Partners to be decided within the next two to four months.

Argument Report: When Is a Nonsuit a Final Claim for Res Judicata?

By Kirk Jenkins on Posted in Illinois

With this post, we begin our reports on the oral arguments for the Illinois Supreme Court’s September term. In Hernandez v. Bernstein, the first civil case of the term, the Court seems likely to hold that plaintiff’s two successive complaints were alternative versions of a single claim, meaning that plaintiff’s voluntary dismissal without prejudice of the claim did not preclude the subsequent re-filing of the action.

The facts and lower court ruling in Hernandez are set forth in detail in our argument preview. The plaintiffs sued their former attorneys for failing to advise them of a third party products liability claim related to a workers’ compensation claim. The products claim was dismissed as time barred, so the plaintiffs amended to allege that the defendants should have advised them to sue their former lawyers. Not long before trial, with a motion for summary judgment pending, the plaintiffs voluntarily dismissed their claim without prejudice. So when the plaintiffs re-filed, was their action barred by res judicata?

Defendants’ counsel argued that the "single theory of recovery" analysis applied by the Appellate Court did not fit the circumstances. Rather, the first complaint involved a products liability claim which was wiped out by the trial court, and a new claim for professional negligence was pleaded. Justice Thomas asked counsel what was wrong with the plaintiffs’ argument that the case was all a single claim: the law firm’s negligence in not informing the plaintiffs of all potential causes of action arising from the injury? Counsel responded that the issue turned on the definition of a claim. The first action involved a set of operative facts that caused injury to the claimant. Later, a different set of operative facts arose — failure to advise. Justice Thomas followed up by asking what was wrong with the proposition that the initial court order merely adjudicated certain facts in support of the claim — a claim plaintiffs were given leave to amend? Counsel argued that the initial court order had finally adjudicated a separate products liability claim.

Justices Karmeier, Thomas and Theis each separately pressed counsel on whether the initial order of dismissal without prejudice was final and appealable, even though it expressly stated that dismissal was without prejudice. Counsel responded that the order was final with respect to the products claim, although it only became appealable upon plaintiffs’ voluntary dismissal.

Co-counsel for defendants addressed the plaintiffs’ alternative argument that res judicata was inapplicable because the plaintiffs had expressly reserved the right to file a new action, arguing that plaintiffs had forfeited the issue by failing to raise it in the trial court. Justice Thomas asked whether, given that plaintiffs were appellees in the Supreme Court, they had a right to affirmance on any theory supported by the record, but counsel pointed out that plaintiffs had been appellants at the Appellate Court.

Plaintiffs’ counsel drew few questions. Justice Burke asked how the defendants could have advised plaintiffs of their purported claim for manganese exposure when their relationship with defendants ended before they discovered the claim? Counsel responded that if defendants had sent plaintiff to a physician, the claim might have been discovered earlier. In rebuttal, defendants’ counsel again argued that the initial dismissal was a final order which became appealable — and thus preclusive for res judicata purposes — when plaintiffs voluntarily dismissed their claims.

Join us back here later today for a recap of the argument in Center Partners, Ltd. v. Growth Head GP, LLC, a case about whether subject matter waiver of attorney-client communications extends beyond litigation to business transactions.

Blast From the Past: The Rule Against Spendthrift Trusts

By Kirk Jenkins on Posted in Illinois

One of the quirky pleasures of every first-year law student’s property class is the amount of time taken up studying rules which were settled around the time that the Tudors were on the British throne — sometimes even earlier.

On Thursday, the Illinois Supreme Court brought back one of the classics, a rule first propounded in the common law at least a half a millennium ago — "spendthrift trusts are void against current and future creditors." The rule against spendthrift trusts has been the law in Illinois for nearly a century and a half, and remains the law in most states.

Rush University Medical Center v. Sessions arises from a Trust established in 1994. The settlor placed around $19 million in property in the trust, and named himself lifetime beneficiary. The trustees were authorized to make distributions to him of both income and principal, and the settlor retained absolute power to appoint or remove trustees, and to veto any discretionary actions. Finally, the trust had a spendthrift provision — no trust assets could go to creditors of the settlor or his estate.

The following year, the settlor made an irrevocable pledge of $1.5 million to the plaintiff, expressly for the construction of a new residence for the president of the University. He executed codicils to his will providing that any unpaid balance on the pledge should be paid on his death. In reliance on the pledge, the University built the residence and named it after the settlor. The settlor was present at the dedication, cut a ceremonial ribbon, and a plaque was placed bearing the settlor’s name.

Ten years later — with the pledge still unpaid — the settlor was diagnosed with lung cancer. The settlor executed a new will revoking all previous wills and codicils and making no provision for payment of the pledge. Just before his death, he created a second revocable trust, transferring additional assets into it, and he then made additional gifts, further reducing his estate. When the plaintiff filed a claim in probate to enforce the pledge, the estate was found to include less than $100,000.

So the plaintiff sued the trustees of the trust. Count III of the plaintiff’s claim, the only aspect of the case at issue before the Supreme Court, invoked the common law rule that a spendthrift trust is void against existing or future creditors. Although the Circuit Court agreed, entering summary judgment for the plaintiff, the Appellate Court reversed, finding that the Fraudulent Transfer Act, 740 ILCS 160/5, supplanted the common law rule by providing specific mechanisms for proving that a transfer by a debtor was fraudulent.

The Supreme Court unanimously reversed. Illinois has a heavy presumption against overturning the common law, the Court noted. Legislative intent to override the common law was not to be lightly found; the legislature’s intentions must be plainly and clearly stated, and cannot be inferred from ambiguous or questionable language. Implied repeal of the common law is disfavored, and can be found only in the face of irreconcilable repugnancy between the statute and the common law. Where the common law is more broad than the statute, there is a presumption that the statute merely supplements the common law; and remedies by statute are presumed to be cumulative only.

Turning to the statute, the Court found no indication of an intent to overturn the common law; indeed, to the contrary: Section 11 of the Act, 740 ILCS 160/11, stated that the common law was not to be displaced but by express provisions of the Act.

Nonetheless, the defendant trustees argued that Section 5(a) of the Act, which sets out a statutory cause of action for fraudulent transfer, was necessarily irreconcilable with the common law rule, which conclusively presumed all transfers under certain circumstances to be fraudulent.

Not so for a variety of reasons, the Court concluded. Where the statute was intended for the general protection of unsecured creditors from unfair reductions in the debtor’s estate, the common law rule applied whether or not the transfer was technically a fraudulent conveyance, and whether or not there was any intention to defraud creditors. The rule and statute did not entirely overlap; each operated in spheres where the other did not. Although the Appellate Court found that the plaintiff’s claim must fail for lack of an allegation of intent to defraud, the Supreme Court noted that the common law rule on spendthrift trusts had coexisted with a rule against fraudulent conveyances for almost the whole of its half-millennium life span.

The trustees argued that the common law rule applied only to assets actually distributed to the settlor before his or her death, as opposed to the remaining assets, but the Court found no conceptual difference between the two. The Court also rejected the trustees’ argument that the plaintiff had not become a creditor of the settlor until his death, concluding that the common law rule applied whether or not the claimant was a creditor during the settlor’s lifetime, and whether or not the claim accrued during the settlor’s life.

Survival, Wrongful Death, and Agreements to Arbitrate

By Kirk Jenkins on Posted in Illinois

At least in theory, the days are long gone in most jurisdictions when courts were openly hostile to arbitration. Nevertheless, petitions to arbitrate are a frequent battleground between plaintiffs and defendants. On Thursday, a unanimous Illinois Supreme Court offered important guidance for determining such petitions, filing its decision in Carter v. SSC Odin Operating Co.

Carter arises from the decedent’s nursing home care. The first count of plaintiff’s complaint is a survival claim alleging that decedent’s personal injuries were caused by violations of the Nursing Home Care Act, 210 ILCS 45/1-101. In the second count, plaintiff purported to state a claim for wrongful death.

The defendant filed a motion to compel arbitration, citing identical arbitration agreements signed during decedent’s successive stays in the defendant’s nursing home — the first signed by plaintiff as decedent’s "legal representative." According to the arbitration agreements, the parties agreed to binding arbitration of any controversy with more than $200,000 at issue. The parties also agreed that defendant would pay the arbitrators’ fees, as well as up to $5,000 of attorneys fees and costs incurred by the decedent, regardless of who prevailed in the arbitration. Finally, the parties agreed that the decedent could choose the location of any arbitration. The trial court denied the motion to compel arbitration in all respects.

A divided Appellate Court affirmed. The majority emphasized the different circumstances faced by the defendant and the decedent: almost any claim that the decedent might have against the defendant was likely to be for more than $200,000, thus triggering the arbitration clause, while the chances that the defendant would have a $200,000+ claim against the decedent seemed slim. Given that the arbitration clause was unlikely to be triggered against the defendant, the majority concluded that it was invalid for lack of mutuality of obligation. The Court held that the wrongful death claim was non-arbitrable because plaintiff had not signed the arbitration agreement in her personal capacity.

The Supreme Court unanimously reversed with respect to the survival claim. The concept of mutuality of obligation, the Court noted, is closely tied to consideration. Whether or not any potential claim by defendant was likely to ever be subject to arbitration was not dispositive; the question was whether the defendant had suffered any detriment in return for plaintiff’s promise to arbitrate. The answer was yes — the defendant agreed to pay the arbitrator’s fees, as well as a portion of the decedent’s attorney fees and costs, win or lose. Since the agreement was supported by consideration, the Court held that the survival claim had to be arbitrated.

Turning to the second count, the defendant argued that wrongful death is expressly described as an asset of the decedent’s estate by Section 2.1 of the Wrongful Death Act. As such, according to the defendant, the decedent necessarily had the right to control the forum or manner in which the claim could be brought.

The Supreme Court disagreed, pointing out that the proceeds of the wrongful death claim do not pass through the estate pursuant to the Probate Act. Further, the Court noted that a wrongful death claim does not abate on the death of a beneficiary; the plaintiff essentially brings the action as a trustee for all the next of kin. The Court concluded that the legislature did not intend that the wrongful death claim should be a true asset of the decedent. Instead, the legislature’s intent was merely to facilitate the filing and prosecution of the claim.

The defendant also pointed the Court to decisions in several states holding that because a wrongful death action is derivative of the decedent’s personal injury claim, the decedent’s promise to arbitrate necessarily governs both. The Supreme Court declined to follow these cases, holding that the generally derivative nature of the claim could not justify disregarding fundamental principles of contract law: since the plaintiff was not a party to the arbitration agreement in her personal capacity, she could not be bound by it.

Equitable Estoppel Against Municipalities Restricted by Illinois Supreme Court

By Kirk Jenkins on Posted in Illinois

The doctrine of equitable estoppel bars a party from denying a fact, or opposing a claim, based on that party’s previous statements or conduct. As a general rule, depending on the circumstances, it can be based on either actual authority, meaning that the speaker or actor had authority to bind the defendant, or apparent authority: the speaker/actor seemed, based on her conduct or statements, to have authority.

So can a municipality be estopped based on the apparent authority of its employees?

On Thursday, the Illinois Supreme Court gave a definitive answer: "No."

Patrick Engineering v. City of Naperville arose from a contract related to a stormwater management system. The plaintiff agreed to provide a "Stormwater Asset Management and GIS Information System." The agreement provided a specific mechanism for dealing with change orders and cost overruns. If a representative of the City verbally requested additional services, the plaintiff was required to confirm the request in writing. The plaintiff would then have authority to proceed if the City authorized the work in writing.

But once the work began, things didn’t work that way. The plaintiff alleged that various emails had been sent, purportedly authorizing additional work. In 2007 and 2008, the plaintiff sent five invoices to the City, totaling within $10 of the entire project cost, but exceeding the proposed cost in every project area but one. The City made a partial payment, but ultimately declined to pay plaintiff’s invoices in full, and the plaintiff sued.

Plaintiff alleged that the City had required additional plans and categories of plans, provided improperly catalogued plans, and changed the size of one of the project areas. The plaintiff did not allege that any City official had authorized additional services in writing.

The plaintiff’s complaint was dismissed without prejudice, as were the three amended complaints which followed. By the Third Amended Complaint, the crux of the case had become whether equitable estoppel could be applied against the City. In its order dismissing the Third Amended Complaint, the Circuit Court concluded that plaintiff’s claim largely revolved around cost overruns for the original scope of work, and that plaintiff had not alleged that any of the employees with whom it had dealt had authority to bypass the provisions of the contract.

The Appellate Court reversed, finding that the plaintiff’s allegations — that it had dealt with individuals who appeared to have been designated to manage the project, based on their titles and conduct — were sufficient to make out a claim for equitable estoppel.

The Supreme Court unanimously reversed. Equitable estoppel is particularly disfavored where the public revenue is at stake, the Court held. A plaintiff seeking to establish equitable estoppel against a municipality must plead specific facts showing (1) an affirmative act by the municipality, or by an official with express authority, and (2) reasonable reliance that induces the plaintiff to detrimentally change position.

The Court held that the plaintiff’s allegations about the titles and statements of the City’s employees fell far short of establishing express authority to informally approve changes to the contract. Nor could the plaintiff allege reasonable reliance: even taking the plaintiff’s allegations at face value, the plaintiff made no allegation that anyone had ever specified exactly how much new work was being authorized.

The take-away from Patrick Engineering is clear. In Illinois, the best way to ensure that a government contractor will get paid for cost overruns and changes in the scope of work is to make sure that the contract provides detailed procedures for such circumstances, and to follow them. Failing that, plaintiffs should make sure to confirm the duties and authority of the government employees they deal with.

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