DR Legal News: Legal Case Studies November 2017

Harms Hartzler

Legal Case Studies

Research and analysis by Lisa Harms Hartzler, Sorling Northrup Attorneys

Sellers held liable for inaccurate disclosures in house sale 

In Kroot v. Shu Chan, 2017 IL App (1st) 162315, the defendant sellers of a single-family residence in Chicago were held liable for executing a false Residential Real Property Disclosure Report and for common law fraud in representing that they had no knowledge of any water infiltration or mold in the house. In their defense, the sellers asserted that they had no actual knowledge of water damage or mold in the basement even though they had (on the advice of their real estate agent) replaced basement carpeting and painted. However, at trial, the plaintiff buyers produced extensive testimony from a neighbor (who noticed stained carpeting and a water-stained armchair discarded in the alley) and a contractor hired to investigate water infiltration that occurred during a rainstorm within 24 hours of the closing (who saw stained and rotten subflooring under the new basement carpeting that appeared to be one to two years old). In short, the trial judge found the plaintiffs’ witnesses more credible than the defendants. “As the trier of fact, the trial judge in a bench trial is in a superior position to assess the credibility of the witnesses and determine the weight to be accorded their testimony” and his judgment will not be overturned unless it is against the manifest weight of the evidence. In this case, the appellate court upheld the trial court’s decision to find the defendant sellers liable for over $64,000 in damages to the plaintiffs. 

Learn more about mold disclosure and seller disclosure in the Legal Minutes video series.

Condominium Association allowed to sue subcontractors (but not designers and material suppliers) for breach of implied warranty of habitability where developer and general contractor were insolvent 

In Sienna Court Condominium Association v. Champion Aluminum Corp., 2017 IL App (1st) 143364, a condominium association sued the developer, general contractor, architects, engineering firms, window and material suppliers, and several subcontractors for breach of the implied warranty of habitability after discovering alleged defects in the windows and roofs that allowed water infiltration and caused property damage. The developer and general contractor had filed for bankruptcy protection, claiming they were insolvent and had no assets with which to pay any claims. 

The implied warranty of habitability is a “creature of public policy” and a creation of the courts “to protect purchasers of a new house upon discovery of latent defects in their homes.” Such protection is necessary because a purchaser generally does not have the ability to determine whether a house contains latent defects and is usually making the largest single investment of his or her life in reliance on the honesty and competence of the builder. If that purchase is defective, the repair costs should be borne by the responsible builder-seller who created the problem, rather than an innocent and unknowing purchaser. This protection has been extended to a condominium purchaser. Generally, a claim for breach of implied warranty of habitability must be asserted against the builder-seller; however, a 1983 case permitted a claim against a subcontractor where the purchaser had “no recourse” against an insolvent general contractor. 

A number of issues were raised in this case, including whether the plaintiff association could maintain claims against the non-construction entities involved in the development. The architects and engineering firms contended that, under prior case law, the implied warranty did not apply to them. The court agreed that the warranty should not be expanded to an entirely different category of defendant that did not participate in the actual construction or construction-sale of the building and had no direct relationship with the buyer. It applied the same reasoning to affirm dismissal of the suppliers who had furnished the windows and other materials but did not install them. 

Another issue was whether the test for extending the implied warranty of habitability to subcontractors turned on whether the general contractor was insolvent or, even if it was insolvent, whether the fact that the plaintiff association had any other “recourse” to recover its losses would bar its claims against the subcontractors. In this case, the bankrupt developer/general contractor had some insurance to cover claims and it had created a “warranty fund” from condominium sales. The plaintiff had already recovered $300,000 from the fund. The defendant subcontractors argued that the court should overrule its prior decisions permitting claims against subcontractors, noting that the Third and Fourth District appellate courts did not allow them and that imposing liability on subcontractors, who did not have a direct relationship with the buyer, did not serve the fundamental reasons behind the warranty. The First District appellate court, however, declined to depart from its own precedent and held subcontractors could be held liable whenever the general contractor was insolvent. “Insolvency simply means that a party’s liabilities exceed the value of its assets, and that it has stopped paying debts in the ordinary course of business.” Neither potential insurance recovery nor payments from warranty funds were relevant to this test. The court found that the plaintiff association could proceed with its claims against the subcontractors. 

Professional license revocation violated procedural Due Process requirements 

In Simpson v. Brown County., 860 F.3d 1001 (7th Cir. 2017), a rural Indiana county passed an ordinance requiring septic installers to apply to have their names entered in a registry and broadly delegated to the county health officer the power to remove from the registry any firm or person who demonstrated an inability or unwillingness to comply with the county rules and regulations. After notifying the plaintiff that repairs needed to be made to the plaintiff’s mother’s septic system, the county health officer revoked the plaintiff’s license. The plaintiff sued the county under 42 U.S.C. § 1983 for imposing unconstitutional municipal policies that deprived him of procedural due process before his license was revoked. 

The court first acknowledged that a professional license was a government-created property interest long protected by the Due Process Clause of the Fifth Amendment to the U.S. Constitution and applicable to the states under the Fourteenth Amendment. The basic rights guaranteed consist of notice of an intended adverse government action and an opportunity to be heard in response. However, the procedures required to afford due process sit on a spectrum—at one end, a full trial-type evidentiary hearing before a deprivation, and at the other, procedures conducted after summary action taken in response to an emergency. Exactly what process along this spectrum that is due in any given situation must weighed by three factors: 1) the private interest at stake; (2) the risk of erroneous deprivation and the value, if any, of additional procedural safeguards; and (3) the government’s countervailing interest. 

In this case, the first factor weighed heavily in favor of the plaintiff. By revoking the plaintiff’s septic license, the county deprived plaintiff of his livelihood, a severe action. Under the second factor, the court found that the process by which the health officer could remove someone from the registry was so unspecific that there was a high risk of error. No warning, to say nothing of a fair opportunity to be heard, was required before the health officer could revoke a license for vague allegations of non-compliance. The court did not believe that the cost of basic procedures for meaningful notice and an informal hearing before revocation would be unduly burdensome to the county. Finally, although the protection of public health was a prime example of a strong government interest that could justify summary deprivation of property, there was no indication on the record that any septic problems associated with the plaintiff were so serious and so urgent as to justify summary revocation. After balancing these factors, the court held that the plaintiff was denied procedural due process. 

The court also found that the plaintiff did not have an adequate “post-deprivation” remedy that would provide meaningful redress to the plaintiff because Indiana law did not provide a way for him to be compensated for his economic losses during the time his license was revoked. The court reversed the district’s dismissal of the plaintiff’s case and sent it back for further proceedings. 

Ban on overpass signs upheld, but limit on signs within 100 feet invalidated 

In Luce v. Town of Campbell, United States Court of Appeals for the Seventh Circuit, No. 15-2627 (September 22, 2017), two Tea Party members decided to draw attention to their views by placing banners on the pedestrian bridge over I-90 in Campbell, Wisconsin. The banners, containing messages such as “HONK TO IMPEACH OBAMA,” led the town council to enact an ordinance forbidding all signs, flags, and banners (other than traffic-control information) on any of the town’s three overpasses or within 100 feet of the end of the structures. The ordinance was a content-neutral time, place, and manner limitation. 

Time, place and manner restrictions must serve a significant governmental interest and be no more extensive than necessary. The plaintiffs challenged the ordinance by contending that such regulations must also require empirical support to justify the infringement on their First Amendment rights to carry or place banners and signs anywhere in the town. The court acknowledged that, after Reed v. Gilbert, “a powerful reason is needed whenever a law classifies by speech’s content.” However, the Supreme Court has “never suggested that empirical support is required for all time, place and manner limits.” Every such regulation needs a good reason, but “it does not take a double-blind empirical study, or a linear regression analysis, to know that the presence of overhead signs and banners is bound to cause some drivers to slow down in order to read the sign before passing it.” Even though the town’s empirical evidence as to the need for the overpass ban to promote traffic safety was slim, the court upheld it as obviously justified. 

The court, however, reached a different conclusion regarding the ban on signs 100 feet from the ends of the overpasses. That part of the ordinance would forbid, for example, a small “For Sale” sign, every political sign, every “Happy Birthday” balloon or “Merry Christmas” sign on the front lawn or door of any house near the overpasses, and every “open” sign in the front door of a shop. Because time, place and manner restrictions must serve a significant governmental interest and be no more extensive than necessary, the court found the town’s lack of any justification for the additional ban required the case to be returned to the district court for further proceedings. 

Proposed electric transmission line denied public utility status 

In Illinois Landowners Alliance, NFP v. Illinois Commerce Commission, 2017 IL 121302, the Illinois Supreme Court held that Rock Island Clean Line, LLC, was improperly granted a certificate of public convenience and necessity for the construction of a high voltage electric transmission line between O’Brien County, Iowa, and a converter station in Grundy County, Illinois. The proposed transmission line would connect wind generation facilities with markets in the Midwest and elsewhere. Rock Island Clean Line claimed that it filed for public utility status because it wanted to comply with the law and also, because the Public Utilities Act preempts local ordinances, to avoid the need to obtain local approval from each governmental unit through which the project would pass. The plaintiffs, who included the Illinois Landowners Alliance, the Illinois Agricultural Association, and ComEd, a competitor, asserted that Rock Island Clean Line simply wanted to obtain the power of eminent domain that can be exercised only by public utilities. The court, however, was not concerned with the applicant’s motives—it decided the case on whether Rock Island Clean Line qualified as a public utility under the Public Utility Act. 

To qualify as an electrical public utility, a company must (1) own, control, operate or manage a plant, equipment, or property used or to be used for the production, transmission or sale of electricity, (2) for public use. The court found that Rock Island Clean Line failed to meet the first test because it merely held an option to buy a parcel of real property where it planned to locate a transmission system. According to the court, “having an option to buy something is not the same as owning or even controlling it. Under Illinois law, an option agreement is simply a contract by which the owner of property agrees with another person that he or she shall have the right to buy the property at a fixed price within a time certain.” The court’s denial of a certificate of public convenience and necessity did not mean Rock Island Clean Line’s project could not proceed as a private commercial endeavor, but without the benefits of being a public utility, its financial viability was perhaps made more difficult. 

FOIA request for assessor’s property data denied 

In Garlick v. Naperville Township, 2017 IL App (2d) 170025, a township assessor’s office entered valuation and assessment information on about 32,000 parcels into a database created and supplied by a software vendor under a license agreement. The public could access this information from the database through a webserver, but only on a parcel-by-parcel basis. Wanting information on the entire township, the plaintiff alleged that retrieving data on every parcel individually would take him an unreasonable amount of time—over 2,600 hours—and did not constitute reasonable access to public information. He therefore filed a FOIA request for an electronic copy of the assessor’s real property database in its native file format. The township denied his request, asserting a FOIA exemption for trade secrets and copyrights claimed by the software vendor. (The township did offer the information on an Excel spreadsheet, which the plaintiff declined.) 

Although the Illinois Freedom of Information Act established a public policy that “all persons are entitled to full and complete information regarding the affairs of government and the official acts and policies of those who represent them,” the Act contains numerous exemptions from full disclosure. In this case, Section 7(1)(a) of the Act protected trade secrets and copyrights that are prohibited from disclosure by federal or state law. The Illinois Trade Secrets Act and federal copyright law precluded the township from disclosing the assessment data in its native file format because it contained confidential, proprietary software developed by the vendor, the vendor did not consent to disclosure, and the township had a contractual duty under its license agreement with the vendor to maintain the secrecy of the database. Finding that a challenge to the validity of trade secret or copyright claims could not be adjudicated through a FOIA claim, the Illinois appellate court upheld the denial of disclosure.